Moscow?s Airport Battle: How The Kremlin Is Moving To Wrest Control Of A $5 Billion Facility From Oligarchs

In the days of the Soviet Union, Domodedovo Airport in Moscow was a relatively small, mostly domestic airport. The international flights that state megacarrier Aeroflot, along with a few Western airlines, flew to Moscow took off from Sheremetyevo Airport, also in Moscow.

Today, the tables have turned. Domodedovo handles more traffic and boasts more flights from prestigious carriers (including Lufthansa and Singapore Airlines) than Sheremetyevo, and it's a leading light in capitalist Russia's booming aviation sector. It is, in fact, Russia's biggest airport.

But in Russia's wild, often unregulated business climate, the true battle is not between the two rival airports. It's between the government and the private owners of Domodedovo, with the former trying by many accounts to pry control of the lucrative airport away from the shadowy company that runs it.

The Russian government has been steadily inserting itself into the operations and finances of Moscow's Domodedovo International with what many believe are plans to eventually seize control of the airport, currently worth about $5 billion. Police raids, questionable accounting and the artful use of rumors are all tools used in trying to take over the city's busiest, most profitable air transport hub.

The battle over Domodedovo has been going on for nearly two years, but when whispers that the airport was up for sale began earlier this month, the Kremlin saw a new opening. The latest scheme is a proposed merger of Domodedovo with Moscow's two public airports -- Sheremetyevo and Vnukovo -- which the Russian Transportation Ministry says is necessary to deal with capacity strains.

The construction of a new runway, which would alleviate the airport's overcapacity problem, is already being talked about, but the owner, East Line Group, is short on funds. The government is trying to step in and invest 27 billion rubles ($890 million) in the project on behalf of Vnukovo, effectively allowing the state to go ahead with the consolidation of Moscow's airports.

East Line Group says that it is not involved in any negotiations to sell any majority or minority equity stake. But East Line might not have the final say in the matter. It may not even be fully in control of one of the most fundamental aspects of a modern airport -- security.

Clever Devils

In January of last year, a suicide bomber passed through a security checkpoint in Domodedovo's international arrival hall with explosives hidden under his jacket, detonating them in the baggage claim area, killing 37 people and injuring 173. The attack immediately opened up the airport to government scrutiny: Then-president Dimitry Medvedev threatened to have East Line's owners put in jail, and an investigation was launched by the prosecutor general. Police and investigators stormed into the airport one Thursday afternoon to seize computers and files, and the government pried open Domodedovo's accounting books.

Five months later, the investigation gave the government enough of an opening to wrangle for itself a 15 billion ruble ($500 million) stake in the company, which in turn has been cited as the reason behind East Line's decision to cancel a planned IPO that would have kept Domodedovo out of the state's hands by putting in public ownership.

At the time of the terrorist act, there was speculation that the security forces were behind it, in part because of the government's plan to take over [the airport], said David Satter, a senior fellow with the Hudson Institute and a Russian foreign policy fellow at Johns Hopkins School of Advanced International Studies.

The prosecutor general discovered that East Line had been using hundreds of off-shore accounts based in places like the Isle of Man to bypass Russian taxes and government scrutiny, which infuriated Medvedev, who said that East Line was hiding the real owners and those making the management decisions at the airport.

Commercial structures have to be open, and not hide and escape responsibility, he said last March.

It is ironic that it was off-shore accounts that caught the government's attention. Not only are shell companies a common practice among Russia's businessmen; government officials commonly use them. Politicians and bureaucrats often syphon off state money through bribes and a hundred other different schemes, said Satter.

According to the 2011 Bribe Payers Index, investors and businessmen pay more in bribes to government officials in Russia than in any other developed economy.

Public money ends up in off-shore accounts, Satter said. They are clever devils. They have all sorts of way of concealing these things.

Moreover, the line between politician and businessman is often blurred. Those in control of major assets get government posts, while friends of politicians are given minority shares in businesses after government takeovers.

Corporate Raiders - In Government

Privately-owned international airports the size of Domodedovo aren't common in the world. Like so many other previously state-owned assets, Domodedovo was snatched up after the fall of the Soviet Union through relatively secret means, by new owners who made billions.

When the Soviet Union collapsed in 1991, on-the-cheap acquisitions of properties like Domodedovo, Yukos Oil and Norilsk Nickel were permitted because the Kremlin wanted to keep these assets in the hands of Russian investors, some of whom were already part of the political elites' inner circle.

Now, in the Russian Federation's adolescence, the state seems eager to get some of its assets and wealth back.

The privatization of many government assets has been of concern to the current administration, explained Edward Mermelstein, a Ukrainian-born real estate lawyer with offices in New York and Moscow. There are and have been many questions as to how these assets have been transferred, so the government is trying to right way may be considered a wrong.

Vladimir Putin's ascension to the presidency in 2000 put an end to the social and economic chaos of the 1990s. The same environment that allowed billionaires to be made overnight had arguably also created the wave of organized crime and semi-legal financial dealings that haunted Russia during that first decade of capitalism. Putin gave Russia a much-needed stability and at, the same time, allowed the so-called oligarchs to keep their fortunes, provided they never challenged him politically.

The power that the oligarchs had under [President Boris] Yeltsin has been curbed, but the result has been a migration of corruption to the state apparatus, said Satter. The corporate raiders, in other words, this time are in the government.

Now, the members of the government run the show politically and economically. The biggest shakedown artists are no longer the bandits; they are the government officials.

The most blatant example of government raiding involved Yukos, once one of Russia's biggest and most successful private enterprises, which was divided up and distributed at low cost to oil companies owned by Putin's cronies following the arrest of its billionaire owner Mikhail Khodorkovsky, who had broken Putin's no-politics rule.

But there are many other examples; the government has become involved in companies ranging from cosmetics makers to internet providers. Now, Domodedovo could be the next Yukos, its assets given over to officials like Igor Yusufov, an energy minister during Putin's first term, who was named as a potential buyer last year.

But this being Russian business, the government's targets are not themselves blameless. East Line was certainly trying to avoid paying taxes and to hide its wealth, as do many Russian companies.

The structure of East Line is typical for the ownership of any major asset. It's set up to maximize the tax ramifications, Mermelstein, the attorney, said.

They hide their money, their money flow, their criminal connection and they hide their government connections, said Satter. There are few angels there (in Russia).

East Line even hides its management. Dmitry Kamenshchik, the self-made billionaire who founded East Line, isn't officially listed as the head of the company, and last summer he refused to shed light on who actually ran his business after a reporter confronted him.

The airport is comprised of all kinds of property, Kamenshchik said. Different property is owned by different owners. The airport complex consists of many legal entities with different shareholders.

One of those shareholders is a Cyprus-registered company called Hacienda Investments, which owns a total of 322 pieces of Domodedovo property, according to the St. Petersburg Times.

This brand of secrecy has been going on since East Lines' inception, as an Asia-Russia import-export business, in 1993. After raising some capital, the company began buying up one piece of the airport at a time, investing in catering services, air traffic control, fueling stations, customs operations and so on. By 1996, East Line effectively controlled the airport, and rumors about the company and its owners have been swirling ever since.

Last July, there were reports that Domodedovo was using counterfeit software for its flight control operations. Russian financial analyst Andrei Sotnik believes that East Line has ties to the KGB, perhaps through Kamenshchik's business partner Valery Kogan, who was once an ally of Putin, ex-KGB man himself.

Various publications and newspapers like the business daily Kommersant have also raised claims of suspicious activity at the airport including smuggling and made-up accounting. Additionally, according to Sotnik, the deed to Domodedovo has changed hands 13 times since East Line took over.

A Valuable Lesson

No matter what is going on in the battle for Domodedovo, East Line has few tools with which to fight off the government. No legal case has been brought against the Kremlin yet, nor is that likely to happen.

Russia's oligarchs and businessmen learned an important lesson, after Khodorkovsky's trial, about messing with the state. It wasn't hard for prosecutors to find evidence of fraud and tax evasion at Yukos, nor was it hard for the government to take the oil giant for itself after that. East Line, while following practices that many others do in Russia, could be exposed to the same risks because of them.

Although it would mean losing some of its share of the airport, East Line's best chance at keeping the government out will be to find and vet its own private partners. That could prevent any proposed merger with Moscow's public airports, and keep Domodedovo in private hands. Then, of course, the challenge would be finding out whose hands those really are. But in Russia, that's a problem for another day.