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. Last Updated: 07/27/2016

East Line Loses Domodedovo Lease

East Line Group has lost the rights to operate Domodedovo Airport after a Moscow arbitration court on Monday annulled the management company's 75-year lease on the country's most modern gateway.

The decision comes after years of litigation between East Line and the Federal Property Fund, which claims that the lease was invalid because it was not properly approved and allowed the company to pay unduly low rent.

East Line said that the ruling would not immediately affect day-to-day operations, and that it would most likely not appeal.

Since 1998, East Line has invested more than $500 million into refurbishing a glum Soviet terminal into a state-of-the-art airport that has drawn such airlines as British Airways, Swiss International Air Lines, Sibir and Transaero away from moribund Sheremetyevo Airport.

Yet East Line has long had an uneasy relationship with the authorities. In 1998 it was targeted in an Audit Chamber report, and in 2000 it was probed for allegedly carrying contraband goods.

The Moscow District Federal Arbitration Court on Monday ruled invalid a 1998 lease that literally gave the entire airport -- from buildings and taxiways to refrigerators and telephones -- to East Line's subsidiary, International Airport Domodedovo.

"The agreement was annulled as it did not serve the interests of the Russian Federation," said Larisa Usova, a spokeswoman for the property agency.

The agency complained that state administrators lost control over airport security. Furthermore, it said, the generous terms of the lease -- which was not approved by the Federal Property Fund -- resulted in losses to the federal budget.

East Line struck a conciliatory tone Monday.

"We are paving the way for a resolution of this issue," said Yulia Mazanova, an East Line spokeswoman. "We have made our proposals to the property agency and the Transportation Ministry about a new payment agreement. ... The airport is operating without disruption."

Mazanova said East Line would most likely not appeal.

Neither East Line, nor the property fund would provide details on how much the company pays in rent or how much the government is seeking.

Quoting an unidentified source in the Transportation Ministry, Vedomosti reported on Monday that East Line pays 3 million rubles ($107,000) per year. A tenant airline told the paper that the rent is 900,000 rubles per month.

The leasing dispute has reportedly caught the attention of the presidential administration. The Kremlin has charged the Economic Development and Trade Ministry with talking the property fund into reaching an amicable agreement with East Line, Vedomosti reported Monday.

"If the airport has been transformed, but at the time East Line got it improperly, then there is a reason to sit down at the negotiating table," presidential aide Igor Shuvalov was quoted as saying.

Natalya Odintsova, head of research at Prospekt brokerage, said the court decision came after East Line published financials for Domodedovo last month ahead of a 3 billion ruble bond issue to finance expansion.

According to the company, nine subsidiaries that operate the airport earned a combined 9.5 billion rubles in the first nine months of last year with a pre-tax profit of 4 billion rubles, or 42 percent. The company release said that most of the companies were owned by residents of the Isle of Man.

Dmitry Kamenshchik, chairman of East Line, is believed to be the main benefactor.

"It is not surprising that such profitability attracted government attention," Odintsova said.

Market watchers and players were upbeat that a resolution would be found.

"I am sure East Line will regulate this issue and renegotiate lease tariffs. It is too profitable a business to lose," said Odintsova.

Karl Ruppel, head of the Transportation Ministry's government policy department, said he also believes a new agreement will be signed.

"We are not alarmed," said Markus Schmid, country manager for Swiss. "East Line has proved to be the best in Russian civil aviation, it's a showpiece for the country. I don't expect the government will come and say 'Lower your pants!' There will be talks between the two sides."

But Ilya Novokhatsky, spokesman for Sibir, warned that if East Line's rent is raised, service prices for airlines -- and eventually ticket prices -- would reflect the difference.

Daniel Burkard, commercial manager for British Airways in Russia, said he hopes that rates will not increase significantly. "It will be short-sighted, as companies will have to increase fares, cut frequencies, and fewer passengers will fly, spend money," he said. It will not help Moscow or Russia."

The dispute was not the first between the state and East Line.

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 the Federal Security Service, or FSB, and the Prosecutor General's Office investigated East Line airline -- then still part of the group -- for allegedly moving contraband goods.

East Line's Mazanova said Monday those cases have long been regulated.

While market conditions may not have existed in the Domodedovo lease, Odintsova said that "at the time when East Line came, there were not many takers for a dilapidated airport."