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Analysis & Opinion
27.09.10 Hotelier Maneuvers
By Svetlana Kononova

The construction of one of the largest hotels in Russia is being planned for the 2014 Olympic Winter Games in Sochi, Olympstroy, the state agency responsible for Olympic construction, has reported. Investment in the project will come from the AST Group, which belongs to Telman Ismailov, the former owner of Moscow's Cherkizovsky Market and one of Russia’s most extravagant oligarchs.

The three-star hotel complex with 3,850 rooms will be built in the Imeretinskaya Valley near Sochi, and will take up 24.6 hectares of land. The general contractor of the project designed by the MNM-Project architectural bureau will be the AST-Kapstroy building company. “The project will cost about $800 million. But this apartment-hotel will not be the largest in Russia. The Ismailovo hotel complex in Moscow will keep that accolade,” said Natalya Simorova, a spokesperson for Olympstroy.

The hotel complex should be in operation in 2013. “The architectural concept of the project is still being developed. It is supposed to be approved soon. The name of the hotel complex will be approved soon as well,” Simorova added.
AST Group also plans to build a 150-room five-star hotel in the Imeretinskaya Valley, which will take up 0.98 hectares. This luxury hotel should be completed in 2013 as well. But are these projects really profitable? And are they being built because of political pressure on businessmen to invest in Olympic construction? Here expert opinion differs, but the recent scandal surrounding AST group is already reminiscent of a thrilling detective story.

The owner of AST Group, Telman Ismailov, a man who ranked 76th on Forbes’ list of richest Russian moguls in 2007, is famous for his extravagant lifestyle and crazy spending. He once paid Jennifer Lopez $1.4 million for singing a ten-minute rendition of “Happy Birthday.” Moreover, Ismailov is known to be a close friend of Moscow Mayor Yuri Luzhkov.

In 2009 Ismailov opened the luxury five-star Mardan Palace Hotel in Antalya, Turkey. The project was estimated to have cost $1.4 billion. The hotel, named after Ismailov’s father, is considered to be the most expensive luxury resort in Europe and the Mediterranean. The 560-room complex includes the Mediterranean's largest swimming pool, a 1,100 square meter luxury spa center and a long beach for which 9,000 tons of sand were specially imported from Egypt. The building is famous for its lavish design, which used 500,000 crystals and plenty of gold and Italian marble. The complex contains a replica of the Big Istanbul bazaar where fur coats, gold and silk are sold. The most expensive rooms in the Mardan Palace cost $19,000 per night. It is worth noting that Ismailov applied for Turkish citizenship after opening the Mardan Palace.

Mardan Palace’s opening ceremony on May 23, 2009, coincided with the economic crisis wreaking havoc on Russia. The extravagant ceremony, which brought together celebrities such as Sharon Stone, Richard Gere, Tom Jones, Monica Belucci and Paris Hilton, attracted the wrath of the Russian authorities, and it was directed against Ismailov. Prime Minister Vladimir Putin subsequently made the timely observation that Russian businessmen who have money should invest it in Russia. He cited the construction of hotels in Sochi as a possible area of investment.

The government’s indignation at the lavish opening ceremony was one of the reasons why Ismailov lost his most profitable project – the Cherkizovsky Market, which was closed by Moscow city authorities in June 2009. The Cherkizovsky Market, also known as “Cherkizon,” was one of the largest marketplaces in Europe. It employed roughly 100,000 workers, mostly illegal migrants from China and other Asian countries, and was known as a hotspot of crime and racist attacks on immigrants. When the market was closed, most Muscovites supported the decision, a poll conducted by the independent Levada Center found.

In light of the above, it is possible that investing in Sochi may help “rehabilitate” Ismailov in the eyes of the authorities. “It is fair to suppose there being political reasons behind building the hotel complexes in Sochi, but generally speaking it is profitable to invest in the hotel sector in Russia,” said Maxim Klyagin, an analyst at Finam Management. “The hotel market is completely unsaturated. There is a pronounced deficiency of good-quality accommodation in the country. Even in the largest Russian cities the number of available accommodation is five to ten times less than in west European capitals. In many middle-sized cities there still are no quality hotels. But in Russia the success of each investment project depends a lot on the location of the hotel, while in west European countries local markets are more stable and balanced. Obviously, revenue per available room in Moscow is now one of the highest in the world. Probably, the situation in Sochi would be the same,” he added.

Klyagin said it would be difficult to predict how many years it would take to recover investments in such large projects as the hotel complex in Sochi. “Probably the pay-back time in this case would be significantly longer than the standard eight to ten-year period, which is typical for big building projects,” he said.

At the same time, the Kommersant news daily wrote that few investors are interested in building hotels in Sochi, meaning that tenders placed by Olympstroy often become a formality. The long payback period and the problem of infrastructure in the Sochi region are the reasons behind their passivity and doubts, experts say.

But there is also the very important question of how the large hotel complexes will be put to use once the Olympic Games are over. “After the Olympic Games the apartment-hotel will be transformed into residential accommodation,” Simorova said. Nonetheless, it is still unclear whether the apartments will be sold to private customers or put up for rent instead.
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