Sinara plans to punt its debts into the taxpayers' pocket

02.02.2011 — Analysis

Ekaterinburg is one of a number of Russian cities where the 2018 World Cup games will be played. However, the capital of the Sverdlovsk region still lacks a sports arena that meets FIFA's requirements. The regional government has promised to rebuild Central Stadium in time for the games and has asked the state Vneshtorgbank for funds. Globex, a subsidiary of VTB, has agreed to provide a billion-ruble loan. But experts think that the money won't help, since it would be impossible to bring Central Stadium up to FIFA's standards. As this columnist for "RusBusinessNews" has determined, the reconstruction of Ekaterinburg's main sports arena is just a coverup for business, based on the sale of expensive state money. The public is paying for governmental "incompetence".

The reconstruction of Ekaterinburg's Central Stadium began seven years ago, long before Russia was chosen as a host country for the 2018 World Cup. The city government did not have enough money at its disposal, so they decided to try to bring in private investors. The joint-stock company Central Stadium was created, 75% of whose shares were owned by Sinara Group. The city owned the other 25%. By 2009, the investor had spent 500 million rubles to eliminate a neighboring private housing development and relocate its residents, and about 750 million had been spent on the actual reconstruction of the stadium. Interest in the stadium project faltered during the financial crisis, and financing for the facility dried up.

The construction project revived after the government of the Sverdlovsk region purchased 25% of the shares from Sinara Group at a cost of 80 million rubles. The government then worked hard to find credit to complete the project. In the end, they found success with Globex JSC, a subsidiary of the state Vneshtorgbank. In 2010, an agreement was signed on a ten-year loan for 1.2 billion rubles, backed by the security of the regional government and the stock shares.

While searching for money, the project's sponsor actively sought to "get the construction site under control". The agreement with the general contractor, the construction company Neimar Engineering (Montenegro), was terminated in the spring of 2010. Astra-Stroi, LLC of Ekaterinburg took its place. It was Astra-Stroi, which, on the recommendation of experts from the Technology engineering and innovation center, demolished the north and south stadium stands that had been built from scratch. The design and construction firm Dominanta then undertook to redo the project.

The new general contractor's representatives refused to explain what was going on at the construction site. Astra-Stroi's chief engineer, Sergei Ivanov, did not say why it was necessary to tear down the completed stands, and his colleagues did not answer questions about how much all this was going to cost. Vladimir Borzenko, Dominanta's chief engineer, was able to clarify matters somewhat when he explained that the stands were razed because their support structures had weakened. "However," he added, "we weren't the ones who did the survey, so I can't say how valid the findings are". Vladimir Borzenko explained that this new project was the result of the need to incorporate FIFA's new requirements for World Cup stadiums.

Aleksandr Kitashev, Neimar Engineering's Ekaterinburg representative, claims that it is essentially impossible for the city to meet FIFA's requirements. The stadium is an architectural monument designed to seat 27,000 spectators, and thus any modification of its dimensions is forbidden by the Ministry of Culture. The regional government is counting on the use of temporary seating to increase the stadium's capacity to 40,000. Aleksandr Kitashev claims the idea of seating 13,000 people on "swinging benches" is pure fantasy. FIFA's other demands are also unattainable: the stadium is located in the middle of a residential area and cannot expand its recreation zone from 10 hectares to 24. Actually, it doesn't make sense to try to do this for the sake of one or two World Cup matches - the rest of the time, no more than 5,000-6,000 people walk to the home games.

Alexander Kitashev doesn't think there was any reason to tear down the stands - restrooms, snack bars, and shops could have been erected there without any demolition. Citing the findings of experts, he rejects the idea that the construction was too shoddy. Arno Epp, the deputy director of the construction consulting company GeoStroiEkspert, calculated the load-bearing capacity of the reinforced concrete in the stadium's south stands, and confirmed to "RusBusinessNews" that the flexible structures are 1,5 times as strong as they are required to be, even taking into account the manufacturing defects that have been identified. He claims the columns are four times as strong as necessary. He doesn't think that the stands were razed because of flaws in their construction.

Aleksandr Kitashev is sure they were torn down to avoid paying Neimar Engineering for their work. Neimar Engineering filed a claim for 300 million rubles against JSC Central Stadium in the Sverdlovsk court of arbitration. During the trial, it emerged that the company could not substantiate part of the work that had been done, and that some of their work was of poor quality. After that, Neimar Engineering reduced the amount of their claim to 200 million rubles. Central Stadium's management thereby filed a countersuit against the contractor for almost 400 million rubles.

Experts suggest that Neimar Engineering was just creating a setup to hide the truth behind the financial dealings that are part of the reconstruction of Central Stadium. The amount of money requested by the project's sponsor at its completion is clearly at odds with the total cost of rebuilding the stadium - before receiving the loan, the investor's representatives claimed that the stadium was 80% finished. It turns out that the project's sponsor requested as much money for the finishing work on the building's frame, which was responsible for about one-fifth of the cost estimate, as for the concrete work, which makes no sense. Apparently, in order to falsify the amount of work that had been completed, the project's sponsor at first used jackhammers during the inspection of the columns' the load-bearing capacity, effectively and savagely destroying them - and then completely razed the stands, sinking the ends in water.

Experts claim this showed that the project's sponsor even wanted Neimar Engineering to return the money it had already been paid. Perhaps they want to finish the stadium at the former general contractor's expense, and then spend the loan from Globex to cover Sinara Group's losses from its investment in the community facility. The size of the loan supports this version of events. It is remarkable how well the loan amount matches the sum spent by Sinara Group on rebuilding the stadium.

But what's even more interesting is the fact that the state is financing a private investor. The government officials surely knew that the World Cup could never be held in Ekaterinburg in Central Stadium, even before Globex made the loan offer. But the money was allocated anyway, although it came with a draconian interest rate - at first it was 17% annually, but is now 12.75% (the refinancing rate plus five percent). A successful business can easily borrow abroad right now at 6-9% per year. Only a complete idiot or a business that's tight with the government would agree to the conditions set by Globex. That business would have to be assuming that they could transfer the responsibility for paying off the loan to someone else. There are suspicions that Sinara is itching to shift this loan over to Sverdlovsk's regional budget.

Rumors are circulating among the builders that a private investor has made an offer to the government to take over the shares it owns. The press office of the Sverdlovsk regional Ministry of Asset Management has neither officially confirmed nor denied Sinara's plans. Meanwhile, the government took the first step in this direction by approving Sinara's transfer of 25% of the shares of JSC Central Stadium in an open-ended guarantee. In view of this, experts aren't ruling out that the investor might not recover the loan from Globex. And at that point the burden will automatically fall on the regional budget. And do the taxpayers really need to be caught holding the ball like this?

Vladimir Terletsky