People in the Know: How Much is the New Sochi?

The municipal transport and engineering infrastructure will undergo a major overhaul. That is why Greater Sochi and its countryside today are reminiscent of a complex urban development site. Construction of the “new” city will require spending of 122 to 313 billion rubles, to be provided by federal and regional governments, and private companies. Mayor Viktor Kolodyazhny, a man of the Krasnodar governor’s team, is convinced that investors will take interest in the ambitious project, given favourable terms they will be offered. The mayor is certain that Sochi will win the bid to host the Games.

-The only Olympic sports venue Greater Sochi has today is the central stadium. Was not it too risky on your part to file a bid to the International Olympic Committee?

IOC officials have told us: “You are lucky, for you have an chance to create the 21st century facilities.” True, almost all sports venues will be built from scratch, but then they will be built in accordance with the most modern international standards, in line with the latest requirements of international sports federations. The buildings works have already begun.

We have already laid the cornerstone for the future Olympic Village in Imeretinskaya Valley, in the coastal area of the Olympic Games. In the near future we will be testing the first phase of the alpine ski complex Karusel. The project is financed by National Business Bank (Natsbiznesbank). Interros is beginning construction of the Roza Khutor ski complex. Another complex is to be commissioned shortly by Gazprom on Laura River.

-Do you think you will win the final round in the race against Salzburg and PyeongChang?

I am sure we will. We have developed a very detailed Olympic concept. The bid book will contain 17 chapters, each providing a description of the state of affairs in sport, tourism, transportation, and in every other sector, laying down our development plans and guarantees for investors and creditors. That is a kind of a business plan. It includes all facilities, necessary for hosting the Games. The city will offer comfortable conditions to athletes, fans and tourists. For example, we plan to organize transport services in such a manner so that a distance from any point in the city to another will not take more than 20 minutes. Besides, is there any other place in the world where you can find such a combination of snowy mountains and the sea? Just imagine –Winter Olympics at the seaside! Another important criteria a host city must meet is the availability of a giant slalom run. We have such runs available on the Roza Khutor plateau in Krasnaya Polyana.

-Who consults you on the development of sports facilities?

There is no need to re-invent the wheel. We have invited international consultants working on that market for many decades, with a track record of successful bidding campaigns. There are consultants who advise us on marketing issues, others on the development of sports facilities. For example, our team includes the sports marketing agency IMG, the FCB advertising network and a leading public relations agency Weber Shandwick. HOK Sport Venue Event designs the plans of all future sports installations. Helios Partners is working on the bid book, while ICON is responsible for the new look of the city. This fall we are to receive final approval of the sites where future sports venues will be situated, from the international sports federations.

-How much do you plan to spend on the Olympic promotional campaign?

(Our interlocutor pauses, waiting for the next question.)

-This is not the first time Sochi files an application to the IOC. Whose idea it was to try again?

The initiative belongs to Governor Alexander Tkachyov. But the idea won support on the top government level. We receive backing from President Vladimir Putin, deputy head of the Russian government Alexander Zhukov, Russian Olympic Committee president Leonid Tyagachyov, presidential envoy to the South Federal District Dmitry Kozak and from the public, too. Latest opinion surveys reveal that as many as 63% of Russians believe that our project is important.

-You have strong support, indeed. Could Sochi’s victory be predetermined in the preliminary round of the race when the final three candidates were shortlisted?

The shortlist could contain four, or even five candidates. After all, the competition was very tense. Do you know that before we made our bid, many people abroad had no idea what Sochi is and where it is situated?

And still you managed to get on the list of three finalists?

We presented our program to the IOC and the international jury found it interesting. Today we have to prove that we are able to do what we have pledged to do. Titanic efforts applied by the Sochi team, too, have played their role. After all, we had to vie with no-nonsense candidates from Almaty, Jaca and Sofia.

-How did neighboring towns respond to Sochi being approved as a favorite?

All I can say is that today the authorities of the towns and the entire region work together as a single team. This year we presented our projects on behalf of the Krasnodar regional government on international level three times. We attended the economic forum in London. For six years now we attend the international property show in Cannes annually. Our projects were presented in Germany. We have our leader – the governor of the region, who applies every effort to promote our growth.

-Will you be able to meet the 2014 deadline?

Undoubtedly. I am a builder myself. In the Soviet times I ran a construction trust. I know how properties are built and how long it takes.

-The federal target-oriented plan for the development of the Sochi mountain resort till 2014 was approved by the federal government in June. The concept of preparation for the Olympic Games is only a part of that project. Could you outline the federal plan, in a few words?

The key objective of the plan is to develop Sochi’s infrastructure and create conditions for creating an international mountain climate resort. Another task is to provide winter sports training grounds for Russian athletes. For, there are no such major grounds left in Russia. Yet another important task is to create a venue for hosting international and domestic sports competitions. In particular, we must create competitive advantages, so as to win the right to host the 22nd Winter Olympic Games and the 2014 Paralympics.

-The federal program provides for two alternative scenarios, depending on whether the city wins the bid or not. If the bid fails will the city receive less funding?

The first scenario envisages spending nearly 313.9 billion rubles, of which 185.8 billion rubles will be provided by federal center, 9.2 billion rubles by the regional and municipal governments while 118.8 billion by private and public sources. The alternative plan is estimated to be worth 122 billion rubles, of which 56.8 billion will be provided by the federal center, 8.4 billion by local governments and 57.7 billion rubles by public and private sources.

-How soon do you expect those investments to pay back?

Experts say that in terms of economic development, Sochi will need only 8 years to achieve the targets, which it would achieve only in 25 years of uninterrupted economic growth if the city did not bid for the right to host the Olympics.

-The idea to adopt the federal plan for Sochi’s development was first proposed several years ago. But what is its main goal? Was it adopted only because it was decided that Sochi should vie for the right to host the Games? Or was it because the authorities decided to seize that opportunity and encourage investors to finance the creation of the world-class international resort, a Russian Cote d’Azur of sorts?

Those two projects – the federal target-oriented plan and the preparation for the Olympics – are interdependent. But even if the IOC rejects our bid after all we will raise investment nevertheless. The main thing is that the volume of funding we will raise for the development of engineering infrastructure will remain almost the same, no matter whether we win or lose.

-Sochi’s engineering infrastructure has seen no capital repairs since the 1950s. All media outlets mentioned that fact when the bid was first announced. Why is that so?

-I would not like to answer for my predecessors who headed the local administration in previous years. But, we all know that in the 1990s many parts of our country witnessed stagnation. Today we learn to make business. It takes practice. The city administration and our residents are keen on turning Sochi into the most beautiful and developed city. That is one of the reasons why we want to host the Games.

-It has always been difficult to get to the beaches by public transport from remote areas of Sochi. Today, it gets even worse because of heavy congestion in the city. What steps do you take to improve the situation? Proceeding from the federal plan the government is set to spend more money on renovation of transport infrastructure than on all tourist venues and Olympic sites taken together.

The public transportation plan developed by city architects is practically finalized. It comprises road junctions that will help alleviate congestion. Several new roads will link Sochi districts to strategically important Olympic venues. There are many problems, of course. But the amount to be allocated is considerable – some 115 billion rubles, of which 108 billion will be provided by the federal government. I think those problems will be solved.

-In other words, you are set to fundamentally upgrade you transport infrastructure?

Perhaps, that will be our main accomplishment. New transportation projects in Sochi are already underway. We visited Germany and traveled from Germany to Switzerland to study their roads and adopt their experience. As a result, we have built a European-class road linking the airport to Krasnaya Polyana, in only 24 months.

-That is a very good road, indeed, especially for a mountainous area. I have seen it, too. A part of this road runs through the longest tunnel on the Black Sea coast. What is the cost of the project?

We spent approximately 700 million rubles on the construction of the road proper, and about 2.5 billion on the tunnel. Now we are building a by-pass road around the city so as to alleviate car traffic in the center. This project will cost another 15 billion rubles. We are using high-end construction equipment, laying 200 meters per month.

-When do you plan to clean up and develop Sochi beaches? It is no secret that they remain largely neglected…

The regional government has held a tender for development of beaches. The investment component of the project envisages providing paid services on the beach. The list of enterprises providing cleaning and all sorts of commercial services has already been compiled. We decided to remove unauthorized retailers from the quays and hired workers who keep our beaches in good order. There are also plans to move the railroad from the coastal area to another part of the city. But the timing for that project is yet to be set. On the whole, I think that after the federal plan is finalized Sochi will become the cleanest part of the country.

2.65 billion rubles will be allocated for environmental programs alone. The entire set of measures will help improve the environment in the area. We are set to conduct a major overhaul of existing water supply networks and build new water treatment works. To that end, the federal plan provides for allocation of 9.5 billion rubles. Modernization of transport infrastructure, too, will help improve the ecological situation, as measures are taken to alleviate congestion and reduce air pollution in the city center. The plan for restructuring of the energy sector includes measures to switch boilers from fuel oil to natural gas, the step that will reduce toxic emissions 1,800-fold.

-Is that true that the IOC’s decision will depend on the state of the Sochi seaport?

The redevelopment of the seaport is included in the coast area development plan. Our plan is to redevelop it into a passenger port, whereas the cargo port will be moved beyond the central district of the city. That will boost the appeal of the city. We hope to do that at the expense of the Olympic funding.

-Which major investors and developers have already joined the project to build a new Sochi?

As regards tourism, you can have a look at Gazprom’s complex in Krasnaya Polyana. In the beginning, that project was not regarded at an Olympic site. But when the preparations for the Games began it became clear that the complex could be used, too. The Olympic Village will be located in Imeretinskaya Valley. Several projects to be developed there will be financed by the company Basic Element. The valley measures 600 hectares, of which 150 to 180 hectares will be used for creation of Olympic venues. The alpine ski complex on the Roza Khutor plateau is funded by Interros. If other investors show interest in those projects we will hold a tender.

-Which of the projects planned in Greater Sochi and in the countryside, even if being of no strategic importance for the Olympic bid, may help promote the tourism industry on the whole?

We plan to build a gigantic aquarium in Sochi. The investor is a Saudi company Atex International. That will be a world-class oceanarium featuring an enormous sea water pool, several stories high, with each story providing a habitat for certain fish species. The aquarium will house sharks, rays, coral fish, etc… As far as I know, there is no other such oceanarium in Russia. It will require 3 million cubic meters of water and a site of 0.6 hectares, although we still have not chosen a location. The project is estimated to be worth over $10 million.

-Are there any other interesting plans?

We would like to build a mixed-use sports and leisure complex between Krasnaya Polyana and the city. The project is entitled Tennis, Golf and Spa Resort. The developer is UMACO. The project was presented at the property show in Cannes. It is also worth noting that we have prepared a bid to develop a special tourism and recreation economic zone in Khostinsky District of Sochi.

In Khostinskaya Bay, we plan to build a new quay and a marina, an artificial island (similar to those built in the UAE), which will be linked to the shore by bridges. The projected cost of the development is $800 million. Another coastal project is the Stary Gorod complex on Adler Quay, estimated at approximately 155 million euros.

We have developed a concept of a theme park and hotels “Prometheus in the Country of the Golden Fleece”, estimated to be wroth $676,000. We also plan a water sports center near Frunze Park, to be build on an artificial peninsular. The project is estimated at $260 million. A theme park and a hotel are planed on Maly Akhun. For the time being, we are still working to raise funding for all those plans.

-Let us talk about the investment climate and the real estate market in Sochi. What makes the city attractive to external investors?

-We do everything to make them feel happy. They enjoy the most favored nation regime here.

-Who can become an investor of a building project in Sochi?

Anyone, who is willing to do business and has enough cash.

-Are local property operators able to vie with operators from Moscow, St. Petersburg and other Russian cities?

There are over 90% of Moscow companies working in Sochi. Almost all of them are registered in Sochi but their capital comes from Moscow. Also, there are companies from Rostov. Locals are few. We have a strong developer UMACO. Then, there is PrimInvestProyekt, but so far they have only one residential project in the city.

-Do you anticipate an increase in property prices after Sochi’s ambitious development plan is finalized?

Just as elsewhere, property prices in Sochi are set by the market. It is quite likely that if the city wins the bid and the federal plan is implemented the demand for real estate may increase.

-What other factors may have impact on property prices?

Prices vary depending on location. Properties in Lazarevsky District are cheaper than in other parts of the city. Adlersky, given its proximity to the city center, is more expensive. A shortage of space pushes up the prices. The city is large, it measures 350,000 hectares but municipally-owned lands account for only 8% of its territory. The rest are federally-owned lands and natural resorts. Besides, we are working on a program to resettle residents from dilapidated housing stock which measures nearly 200,000sqm. Investors purchase those apartments from residents who act as sellers. Those deals also affects prices.

-What is the maximum price of a centrally located plot of land?

Not long ago we sold 19 sotkas (1 sotka = 0.01 of 1ha) of land under an investment agreement, at $170,000 per sotka, on Vorovsky Street, one of the main retail streets in the city.

-What is the state of the office property market, is there a demand for modern complexes?

The demand for quality office space today exceeds the supply. The sector is growing. So far modern business centers are so few you could count them on the fingers of your hand. In fact, there are only three such properties in Sochi. Those are Sokol, Panorama and Olympiisky business centers. Offices there are let at $40 per 1sqm per month. But the city administration is creating incentives for office investors by reducing land rental rates for such projects. We have divided the city into 100 territorial zones, with each zone assigned special quotients regulating investment activities.

-What is the average prime cost of construction in the city?

Prime cost is one of the factors that have significant impact on prices. Many sites are complicated in terms of geological conditions. Mudslides are common. Quite often builders have to drill deep into the ground, remove slopes… The prime cost of residential project is $500 per 1sqm and over, without fine finish. Retail projects may require up to $2,000, including decorations.

-What is the payback period for shops, hotel projects?

Each project is unique and its payback depends on a variety of factors. A normal payback period is about seven years.

-There is an impression that Sochi is growing upwards, judging by a large number of high-rise projects I have seen here.

This, again, depends on location. In the center we have to build high-rises. This is connected with the effectiveness of projects and with high cost of land. But at the same time this must not be damaging to the city skyline.

-How does the city govern construction works? Is there a general plan for urban development?

We have drawn up the plan but it is yet to be approved. Certain adjustments to the document are being made right now, following the adoption of the federal target-oriented plan. We expect it to be approved shortly.

-Are there any vacant niches left for developers in the city?

Office, retail, hotel and exhibition sectors still offer enormous opportunities for development. The city still has no large shopping centers. Two projects are under construction. Each year Sochi hosts over 50 trade shows, but the city still has no exhibition halls. Besides, Sochi suffers an acute shortage of luxury 5-star hotels. We still have no such hotels. We have to build over 2,000 luxury hotel rooms, some 10,000 4-star rooms and 13,500 3-star hotel rooms. That is a great challenge. But the work has already begun. Not long ago Grant Hotel Spa Rodina, the city’s first boutique hotel, opened on the site of the former Rodina health resort.

-The shortage of lodging facilities is, indeed, felt in your city. Apparently, that is what prompted the city government to launch a specialized plan for hotel development several years ago.

In the early 1990s the number of holidaymakers in Sochi dropped drastically. In 1998, when the country was hit by the financial crisis, Sochi received even fewer tourists. In the summer of 1999 the inflow of tourists increased considerably. Many of them just could not afford a holiday abroad. But we were unable to receive them all, as we could not provide everyone with lodging facilities. That is why we began the development of small hotels. There are problems with the quality of service as well. That is why we insisted on including special training programs for hotel staff into the federal target-oriented plan.

-Which of the existing major hotels are slated for demolition or redevelopment?

Moskva Hotel will undergo reconstruction. The old buildings of Zvyozdny (former Kuban Hotel) will be replaced with new properties. There is also a plan to renovate Zhemchuzhina.

-Isn’t it possible to invite foreign hotel operators? Some reports said there were plans to open a Hilton in Sochi. Is that true?

Several international chains have shown interest in Sochi, Hilton being one of those. Marriott is looking for a site that would meet the chain’s requirements. There are buildings sites we have to offer and we do not plan to encumber investors with the city’s share in the projects. That is either 5% or the sale of the plot to the investor.

-What are your plans concerning privately owned small hotels, which, perhaps, account for accommodation of 90% of vacationers?

We plan to streamline their operations. Earlier we tried to deal with them by issuing all sorts of decrees but then we realized that it was useless. The general idea is to transform those mini-hotels into a single hotel chain, such as Holiday Inn in Europe. That will facilitate control over their operations and quality of services. This year we have increased imputed income tax in some parts of the city. A hotel providing 10 to 12 rooms pays $4,000 to $5,000 during high season. Some districts are downright ugly, with a motley gathering of private inns all built in different style… This problem has to be addressed now. Perhaps, with the help of private investors who will purchase those buildings and create hotel chains on those sites.

Viktor Kolodyazhny was born on June 26, 1953 in Urgench, Uzbekistan. He graduated from two universities. Candidate of science in economics. In 1975 – 1997 Kolodyazhny worked in construction as a foreman, supervisor, senior supervisor, chief engineer, head of the construction department and finally as manager of a construction trust. In 1997 – 2001 he headed the state tax inspectorate in Novokubansky District of Krasnodar Region. In 2001 Kolodyazhny was appointed first deputy head of Armavir city administration. In 2002 elected mayor of Armavir. In January 2004 appointed first deputy head of the Sochi city administration in charge of town-planning, industry, transport, communication and energy sector. In April 2004 elected mayor of Sochi. Viktor Kolodyazhny is married and has a son and a daughter.

Greater Sochi is divided into four districts – Adlersky, Khostinsky, Central and Lazarevsky. The population is 400,000. Sochi is the only subtropical resort in Russia that stretches 145 kilometers along the Black Sea coast. Sochi became a fashionable resort area in the 1920s, when the resort directorate was established in the city. Ever since the city has seen rapid development of sanatoria and health resorts including holiday destinations Volna, Chaika, Kudepsta, Matsestinskaya Valley, highly popular in the 1950s. The city accounts for over 50% of all health resorts of Krasnodar Region. It has 597 health and recreation resorts, hotels and tourist bases, private hotels providing a total of 70,000 rooms. Each year Sochi is able to accommodate 56,000 tourists. 5,587 enterprises operate in the city.