From Soviet Relic to Renationalization Target

If you thought the recent turmoil at Heathrow's new Terminal 5 was as bad as it can get for an international airport, then think again.

While London's flagship gateway has been dealing with lost luggage, angry passengers and flight delays over the past few weeks, Moscow's leading airport has for years fought a bitter struggle for control, court cases, rate hikes and even attempts to renationalize it.

As recently as 1997, Domodedovo Airport was an aging Soviet relic, condemned by officials as dilapidated and dangerous. After just over a decade and more than $1 billion in private investment, however, bustling Domodedovo has outstripped Sheremetyevo as the country's busiest airport.

Located 35 kilometers south of Moscow, Domodedovo now services more than 75 airlines, including foreign giants such as Lufthansa and British Airways. Every day, up to 100,000 people pass through the state-of-the-art terminal, coming and going on almost 600 flights to locations from Houston to Hanoi.

But since coming under private management in the late 1990s, the airport has been dogged by controversy and legal claims. Domodedovo is at the center of a legal tug-of-war between the Federal Property Management Agency and East Line, the secretive umbrella firm that has run the hub for more than 10 years.

In the past few weeks, the legal onslaught against East Line, which owns part of the airport terminal and leases the runways from the state, has intensified. The property management agency is fighting on two fronts -- attempting to renationalize the airport property East Line owns in one court case, and disputing its lease agreement for the rest of the complex in another series of lawsuits.

On March 20, the 10th Arbitration Appeals Court upheld a lower court's ruling in January to return a large swathe of the airport's property to federal ownership, including parts of the terminal. The agency has argued that the airport was illegally privatized in 1997, before its eventual acquisition by East Line.

And although the decision looks like a breakthrough for the property agency in a case it first lodged in 2005, previous legal victories have proven short-lived. East Line has so far successfully appealed court rulings against it filed by the agency, and it is appealing the most recent decision.

"To tell you the truth, we are already very used to dealing with the Federal Property Management Agency," said Eldar Tuzmukhametov, a spokesman for East Line.

The company argues that not only was the privatization process legal but also that the 16 buildings the agency is laying claim to no longer exist.

For 10 years, East Line has been rebuilding, renovating and expanding the original airport, meaning that the buildings once owned by the state no longer appear on federal registers. "If this decision is used as a precedent, then it opens the way for corruption and a redefinition of private property," East Line said in comments on the case.

Oleg Panteleyev, an analyst at industry web site Aviaport.ru, said that despite the ruling, it was unlikely that the airport could actually be renationalized after the extensive upgrades.

The Federal Property Management Agency did not respond to written questions on the subject, saying they needed up to seven days to provide answers.

Following the March 20 ruling, three additional cases from the property agency came to light disputing East Line's long-term lease for the rest of the complex and demanding back payments totaling more than 260 million rubles ($11.3 million).

In one of the suits, the agency is demanding that rental agreements dating back to 1998 be annulled, including a new agreement reached last year. East Line currently pays 92 million rubles ($4 million) per year on its 75-year lease and has an agreement to revise the terms every five years. But the property agency says that is too little.

"We are not even considering the possibility that the rates for the lease will go up," Tuzmukhametov said.

East Line has already had a previous ruling to terminate its rental agreement overruled on appeal. In November 2006, the Supreme Arbitration Court overturned a 2005 decision by the Moscow region's branch of the Federal Anti-Monopoly Service to annul the company's rental agreement.

Tuzmukhametov denied suggestions that the current legal battle would jeopardize East Line's plans to start work on a new terminal, and airlines and analysts agreed that it was too early for passengers to start worrying about the dispute hurting service at Domodedovo.

Several leading carriers working out of Domodedovo were unanimous in their unconcern, and analysts noted that despite the public ownership struggle, a stream of high-profile airlines have defected to the airport over the past few years.

Lufthansa, the biggest foreign carrier to Russia, moved to Domodedovo from Sheremetyevo on April 1 and said they were not worried by the latest news.

"We are busy settling into the new airport and aren't thinking of this. We don't get involved in any political issues," Lufthansa spokesman Aage Duenhaapt said Monday.

Aviaport.ru analyst Panteleyev said, however, that if East Line were forced to pay higher rents, then airlines, and ultimately passengers, could see prices rise.

Most likely, the array of legal attacks from the Federal Property Management Agency is designed to force East Line into agreeing to a rent hike, Panteleyev said. With the airport growing so rapidly, East Line almost inevitably ends up making much more than was anticipated during the lease negotiations, giving the Federal Property Management Agency reason to seek better terms.

Officials face a dilemma over the dispute. If authorities look to probe the possibly shady dealings that saw Domodedovo sold off, they run the risk of wrecking what is undisputedly Moscow's best-run airport, Panteleyev said.

President Vladimir Putin got involved in 2005, before East Line's rental rights were restored, telling ministers working on the Domodedovo issue that "We have to respect the laws, but the state's actions should not lead to the ruining of a successfully functioning business."

But Kremlin spokesman Dmitry Peskov said Tuesday that the president was unlikely to weigh in on the dispute this time around. "This is not an issue for the Kremlin right now," Peskov said. "The issue has to be resolved strictly in accordance with the law."

East Line's perceived plight, transformed into a cause celebre for business rights, has even been brought to the attention of President-elect Dmitry Medvedev. At a meeting Medvedev held with the Russian Union of Industrialists and Entrepreneurs on Tuesday, union head Alexander Shokhin cited Domodedovo's current troubles as an example of how regulatory agencies abuse their power for financial gain.

Although Medvedev did not address the Domodedovo case directly, Shokhin called his response to the subject "very reassuring."

Even before the recent twists in the ownership saga, East Line has had a long record of attracting the authorities' attention, prompting some analysts to suggest that the latest moves are part of the massive battle between government clans for control over the lucrative Domodedovo ownership rights.

In 1998, the Audit Chamber, then the State Duma's budgetary watchdog, found irregularities in the transfer of Domodedovo assets to East Line.

Two years later, in 2000, the Federal Security Service and the Prosecutor General's Office detained aircraft belonging to carrier East Line, then part of the group, for purportedly carrying contraband goods. Both investigations were resolved years ago, East Line says.

"You can't rule out the fact that there are some influential groups keen to take control of Domodedovo, as it a very attractive proposition," Panteleyev said. "But any change in the airport's management would pretty quickly ruin that situation."

East Line's secretive behavior over the years has done little to ease allegations of a shady beginning. The firm has never fully revealed its ownership structure, although CEO Dmitry Kamenshchik is widely thought to be the principal beneficial owner. Finans magazine rated him as the country's 482nd wealthiest person in 2007, with a personal fortune of $90 million.

In early 2005, the firm published data ahead of a bond issue saying the nine subsidiaries that ran the airport earned 4 billion rubles ($174 million) in profit in the first nine months of 2004. Most of the firms were registered in the Isle of Man and owned by residents there.

Domodedovo has drawn plaudits for its management and spurred improvements at other Moscow airports. On March 27, the Airports Council International ranked Domodedovo the best airport in Eastern Europe on the back of its 22 percent passenger growth last year.

In the first quarter of 2008, more than 4 million passengers passed through Domodedovo, up nearly 24 percent year on year, the airport said Wednesday.

The Transportation Ministry has called the airport the national leader for service and security and said Domodedovo's reconstruction was "the largest-scale in the development of Russian airports in the past 30 years."

The ministry refused, however, to be drawn into the fighting, arguing that it was a matter for the owners to resolve.

"The main thing is that the disagreement does not have a detrimental effect on the running of the airport," ministry spokesman Timur Khikmatov said.

"So far, there has been no negative knock-on, and we hope that everything will be solved in the near future."