How to steal an Airport

[mendeleyev]

From the Mendeleyev Journal:

The following editorial by New York Times writer Joe Nocera appeared in yesterday's edition of the NY Times:

The decision to pull the initial public offering was announced on the last Sunday in May, late at night. The company that had been planning to sell its shares to the public — hoping to raise somewhere between $700 million and $1 billion — was the Domodedovo airport, the biggest and best-run of Moscow’s three airports, and the only one not owned by the state.The airport’s investment bankers blamed the problem on the usual suspect: “market conditions” — meaning that they weren’t going to get the price that they had hoped for. And I suppose, in some literal sense, that was true. But it didn’t begin to capture the real story.

A few days ago, I wrote about the human cost of Russia’s lack of respect for the rule of law. There is also a business cost, one that hurts Russia on a daily basis. The decision by the owners of the Domodedovo airport to withdraw its I.P.O. is a perfect example — and helps explain why Russia simply cannot have a modern economy until it has a real rule of law.

It is no coincidence, of course, that the best airport in Moscow is the only one in private hands. The management company, East Line Group, took over Domodedovo in 1996 when it was “a small, rundown airport,” according to The Moscow Times. It poured enormous sums into upgrades and new terminals, attracted new business — and forced the government-run airports to spend money just to keep pace. It was good for everyone — including Domodedovo, which had revenues of $1 billion a year.

This is how the textbooks say capitalism is supposed to work.In January, however, a suicide bomber got past the airport’s security, killing 37 people and wounding 180. Russia’s president, Dmitri Medvedev, ordered the prosecutor general to write a report. It seems fair to say that Russia’s plutocrats saw this as their opening.In mid-May, days before the airport announced its plans to go public, the prosecutor general lowered the boom. His report concluded that the airport’s offshore ownership structure was “unacceptable,” because it allowed Domodedovo, as he put it, “to hide the real owners and those making the management decisions at the airport.”

As is always the case when the plutocrats are getting ready to pull a fast one, the charge has a surface plausibility. The East Line Group’s ownership is byzantine, involving several companies registered in the Isle of Man. Yet somehow that never mattered while it was spending all that money to build a more profitable airport. Besides, offshore ownership is almost as common in Russia as the corporate structure is in America; even state-owned companies often use an offshore structure.

Why do companies go this route? In part, at least, to keep assets away from the grasping hands of the plutocrats.Sure enough, a few days after the report, the news leaked out that a man named Igor Yusufov was putting together a group that hoped to buy a $1 billion stake in Domodedovo. Who is Yusufov? He’s a former energy minister who served under the Russian strongman Vladimir Putin. According to The Financial Times, until a few months ago, he was also a special deputy to Medvedev. The Russian business newspaper Vedomosti described him as a potential “peacemaker” between the government and the airport’s owners.

Read the rest of the article here at the New York Times.

[Faux Pas]

Ah geesh. Hopefully the land baron plutocrats will fail. When traveling to Russia I actually look for airlines flying into DME before I search price. It is inevitable every time I'm going to have a long lay over and I prefer it in DME as opposed to SVO (an airport I detest). Of course this is all for selfish reasons but, it is my money.

[mendeleyev]

Faux, it just plain stinks.

We purchased a single family home not far from Domodedovo airport last year and moved from a NW Moscow area apartment to the area. We love it and I hope to spend quite a bit of the late summer and autumn there after dacha season.

Frankly, it has bothered me about the airport bombing as to how easily the bomber entered the baggage claim area. Unlike the USA where security begins at the gate areas and the bulk of the airports are left unprotected, as you know, in Russia the security process begins even at entry to the airport. I was scratching my head at how/why the baggage claim areas had open access while everything else is seemingly secure.

It just causes one to wonder...

[Faux Pas]

Mendy,
It is truly a shame. During my visits politics is not one of my favorite subjects with family or friends. Inevitably is always a guaranteed conversation a number of times. Unfortunately for Russia, power elite and politics is one and the same. Not that the West is much better but it isn't as brazen. Is there any recourse for the East Line company against plutocrats? Do they have a chance in Hades to recover their investment as planned? Seems their have been a number of companies promised capitalism in Russia only to fall victim and the rules changed mid game.

[BC]

mendeleyev,

Maybe modeled after US airports?  Even in FRA one debarks the plane, goes through the main/open terminal area and down an escalator to the baggage claim area, sort of 'get in free but the problem is getting out'.

Don't know the layout of DME, but there are a number of reasons outsiders can get in to the baggage area in most airports, like meeting disabled passengers, picking up lost baggage, oops.. I walked out and forgot a bag etc etc. 

When entering the airport at ROV, bags were checked at the door by xray, but that's about it.  BTW I was not impressed with door security.. they had the worst equipment and probably least trained staff.  Did see them take apart a couple suitcases though during the 15 minute period we waited for check in to start.  Unlike the later gate checks after check-in they have to check all folks entering the building with one queue..

Of course it's always nice to be able to 'pin the tail' on whomever can be deemed 'responsible'.. in these corporate structures maybe hard to do.  DME is after all a big public transport structure.. I'm surprised that the government had little or nothing to do with security arrangements in the first place, i.e. TSA type with government oversight/employees.

[mendeleyev]

Some good points, BC.

What I'm going to write next will scare you.

Russia typically uses airport employees for security, often ex-military or current police, who are required to pass training in specialized training centres of the Russian Federation and abroad--I have a good friend with the FBI in Phoenix who trains airport security teams in Kyiv, for example.  The Aviation Training Centre in Moscow is under the jurisdiction of the Department of Education of Moscow Region (ah ha! Ouch, the school system is in charge of training the Russian version of "TSA.") The security training and the officers also answers to the Federal Transport Supervision Service of the Russian Federation Department of Transportation--in some respects a sort of leftover union structure from Soviet times.

Many unions in Soviet times (just about every industry had a "union") were part union, part social club, part KGB informants, and in some cases useful for training and compliance.

[BC]

mendeleyev,

Just curious.. I would think that certain parts of DME would be under government control, i.e. customs and possibly post check-in security. IIRC door checks were put in place after this bombing RU wide?

"I was 10 metres away from the explosion. Suddenly there was a flash and then very thick smoke appeared. Everyone panicked because we feared that there would be a second explosion," eyewitness Artyom Zhilenkov told the AFP news agency.

He said many of the victims were taxi drivers gathered outside the arrivals hall.

http://www.english.rfi.fr/europe/20110124-suspected-suicide-bomb-kills-31-moscow-airport

Sounds like there would have been no security at that time, although the article you quoted mentioned "In January, however, a suicide bomber got past the airport’s security, killing 37 people and wounding 180."

Seems to be some conflicting info.

But of course, you are probably correct that the 'government' might be interested in the DME jewel via proxy or trusted businesses.  What was the purpose of the IPO? is DME in financial trouble or has even greater expansion plans?  Don't forget that those in higher government positions do have power even after leaving their posts, in fact maybe more due to connections.  This is nothing new or unique to RU.  A western example - http://www.halliburtonwatch.org/about_hal/chronology.html

As an editorial or one man's opin, I wonder how much weight the accusations can actually carry.

I read the rest of the article and all I really get from all this is that foreign investors are having a difficult time buying a slice of the RU pie, especially the icing on the cake.  Having scraped the domestic cake they are looking elsewhere. The author is representing the views of foreign investors, yet another 'interest'.. 

I can even understand why RU government is wary of the long term effects of foreign investment and why they are being so protective.  IMHO their actions, even by proxy are defensive in nature.  The concept of government itself is in doubt due to big HUGE business.  Very high levels of big players have evolved over time.  You don't see them, you don't hear them but they are there.  Left unleashed they will soon be able to trade whole countries with government becoming a pawn.  Is IPO USA that far off?

[mendeleyev]

IIRC door checks were put in place after this bombing RU wide?

No, they were in place before the bombing. That is why I was puzzled at the easy access to the Baggage claim areas.

I read the rest of the article and all I really get from all this is that foreign investors are having a difficult time buying a slice of the RU pie, especially the icing on the cake.  Having scraped the domestic cake they are looking elsewhere. The author is representing the views of foreign investors, yet another 'interest'.. 

I can even understand why RU government is wary of the long term effects of foreign investment and why they are being so protective.  IMHO their actions, even by proxy are defensive in nature.  The concept of government itself is in doubt due to big HUGE business.  Very high levels of big players have evolved over time.  You don't see them, you don't hear them but they are there.

Well there is no doubt that Western investors grabbed much of the low hanging fruit in the opening years of the post Soviet period. That not only soured the average Russian but most certainly led then-President Putin to react against that type of influence. Unfortunately the pendulum has swung far too widely the other way.

In just a few years there are more millionaires concentrated in Moscow than anywhere else in the world. That wasn't because they had mastered the art of capitalism in a short time, instead it was in large measure a quick rape of ex-state assets into the private hands of those who had retained influence and power, just as you described. The average and ordinary Russian, still un-empowered, was left out of the process of privatization.

Now to be fair, citizens were issued certificates of stock in many cases. However during the dramatic currency devaluations and uncertain economy, most citizens reacted by quickly dumping those in exchange for mere kopeks, fearing the value would fall even further. And just as we saw in the Great Depression, a concentration of wealth took place in those who were in the right place at the right time.

Unfortunately the fear of foreign investment is not limited to "foreign" investors. It extends to everyday life as well. A Russian citizen who builds a business, an idea, a product or service, also has learned to fear those in power. There is a reason why, for generations, Russians have learned that something even as simple as a dacha should be plain and featureless on the exterior, even if palatial on the inside, because anything of value is secure from "taking" only as long as it remains unnoticed by those with the power to take away.

The DME IPO could have been good for ordinary Russians as well. A well managed private asset, profitable, would have allowed the managers to reap the benefit of their initial efforts to then invest in other aviation projects in cities outside Moscow while ordinary Russians invested in a stable company paying dividends and growing in value.

The owners aren't altogether "foreign" either. They just happened to use an offshore structure, as do many Russian companies closely held by the Kremlin, for long-term asset protection. (Russian companies learned this strategy the hard way in the early 2000's as government raids seized offices, accounts and assets as managers stood by helplessly.) Chairman of the Board of the management group Dmitry Kamenshchik is from Ekaterinburg, an Economics major at Moscow State University. The DME investment group Chairman of the board is Valeriy Mikhailovich Kogan, who grew up in the Jewish settlements of Mariupol, Ukraine.

In the past Kogan has been well connected in government services, perhaps having some background in the shadowy security services himself, reportedly with the KGB. Today's problem with the DME group is that Mr. Kogan seems to have fallen out of favour with now-Prime Minister Putin and has been quietly moving his personal assets out of Russia, to Israel. Obviously that hasn't gone unnoticed.