Russian Economic Reform

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Domodedova Airport – what to do?

Published on July 24 2011
Posted by: jeff

President Medvedev has expressed his indignation about the hidden ownership structure of Domodedova Airport which handled 2.3 million passengers in 2010, and which is supposedly valued at around $5 bn. Even after the January terrorist attack which killed 37 people, the “management” of the airport have refused to divulge the ultimate owners.

What should the Russian authorities do about this?

Aside from doing nothing, one option is to resume state ownership (ie nationalization). But, there are probably some more appropriate steps between these two extremes that could be taken.

Some issues to consider are:

(1)   At the most general social level, as a matter of principle, it is probably unacceptable for the beneficial owners of the site of a major terrorist attack, and potentially more direct or indirect attacks, to remain hidden behind a chain of off-shore companies. Going on documentation from a recently abandoned IPO in London, the ultimate beneficiary is Dmitry Kamenshchik who has in the past identified himself as chairman of the board of directors. However, when more recently questioned by investigators he said that “he was only a consultant for the offshore company Export Management Company Ltd., registered on the Isle of Man in the UK.” (How would such games by a “chairman” or an owner be received in Australia, the UK or the USA?)

(2)   While Moscow has three airports that can offer some competition to each other, airports require very significant attending infrastructure which mostly must be provided by the state – particularly roads and railway lines. Because the “barriers to entry” to new market participants are virtually insurmountable, airport competition will be restricted to some degree. Domodedova also has adjacent free land (apparently about 14 hectares) to allow considerable expansion, which is something the other two airports do not have. (Does this mean that it should be subject to special control — via FAC or other means?)

(3)   Domodedova was once owned by the state, but was then “privatized” – or was it “stolen” by way of falsified documents, bribes etc? (Is it like a stolen car, that has been repainted with a new engine, that should be returned to its original owner?)

(4)   From a broader psychological perspective in the fight against present corruption, it might be of some benefit to revisit some of the more egregious examples of the “theft” (under the guise of privatization of state assets) because it would help address the injustice and resentment that many Russians feel – and which helps them justify their own present-day corruption. Taken too far, however, such actions would begin to have negative net psychological effects because too many people would feel that their own assets are threatened.

(5)   Another potential negative is the possible international media and financial markets reaction against any resumption of Domodedova by the state – a la Yukos. However, there is too much romance about  Khordokovsky (who thought he could control law makers with bribes), and it is not hard to argue that, at least in moral terms,  Khordokovsky deserves to be where he is (and should have more companions). In reality, a much more significant case is that of Hermitage and Magnitsky. It seems, on the publicly available evidence, that a man was killed simply because he objected to corruption – not that he engaged in it!

In light of the above, one possible approach by the Russian Government may be:

(1)  Quickly resolve the Magnitsky issue (it can’t be that hard!) in a transparent and just way, and release Khordokovsky (who is “no danger to society”, according to Medvedev) etc on parole on condition that they do not leave Russia to enjoy the benefit of any foreign assets they have stashed away. This would have an immense positive PR effect for Russia;

(2)  Demand immediate information on the complete ownership structure and ultimate beneficiaries of Domodedova and all documents relating to “privatization”. If this information is not forthcoming, begin a public (and open to media) enquiry (with power to compel witnesses to appear and answer questions under threat of jail) into the ownership and “privatization” of Domodedova;  

(3)  Unless the privatization was very “clean” (ie no bribes, falsified documents etc), the government might consider resuming the ownership of Domodedova, or at least depriving it of the land that has not been developed and that is available for expansion of the airport facilities. A resumption of the undeveloped land would not directly deprive the “owners” of any capital invested in airport facilities (although some of this investment may have been undertaken with an eye on future expansion). This land (or even the whole airport) could then be transferred to the Pension Fund and leased back to Domodedova;

(4)  All the above steps should be taken with maximum transparency, and with no possibility that the airport will end up non-state or non-Pension Fund hands.