March 5th, 2015

Monopoly on Takeoff and Landing

avia8_600Only a few know that the majority of airports all across Russia are listed in the registry for natural monopolies of the Federal Tariff Service (FTS), a body authorized to exercise legal control in price and tariff regulation.   In late 2014, FTS suddenly supported the idea of abolishing state regulations of tariffs in the Moscow air hub.  Should this obvious experiment succeed we might witness an explosive growth in prices on air transportation.  Experts disagree on this.  Some of them believe that passengers will not even notice price changes since the fee on regulated tariffs included in the ticket price is allegedly small.    However, according to other estimates, regulated tariffs account for two thirds of revenues from airport aviation activities.  Airports have repeatedly asked the government to consider the possibility to abolish tariffs claiming that this step would improve competitiveness in the sphere of air transportation. It is also obvious that airline companies are not particularly enthusiastic about the abolishment of tariff. Meanwhile, airports, as is usual for monopolies, control the market of air transportation as they deem fit.  While in the Moscow region there is competition between three major airports, in Russia’s remote parts airports are basically the only transport hubs that connect these places to the rest of the world.   Airlines are forced to send complains to the Federal Antimonopoly Service, as it is happening in Surgut, and fuel service providers file lawsuits to the courts against FTS in an attempt to withdraw from the registry for natural monopolies.

In 2011, Vladimir Putin ordered his government to draw up a plan to merge two state-owned Moscow airports, Vnukovo and Sheremetyevo, to found a state-owned company United Airports. However, the Federal Property Management Agency came up with an alternative plan to consolidate state and private assets of these two airports and later fully privatize them.  The consolidation of assets began quite predictably with the appearance of familiar characters such as Arkady Rotenberg, Russian businessman close to the Russian President, and Deputy Prime Minister Igor Shuvalov, known for his privatization activities, who submitted a report to Vladimir Putin, according to which long-term concessions for the airfield infrastructure of Moscow airports will be granted to operators or “other legal entity that wins the tender.” It is also worth noting that the state will provide concessioners with long-term loans from the state pension funds for periods of 20 to 30 years with the interest rate equal to “the rate of inflation plus 1 percent”.

Later, there was talk about including the Domodedovo airport, the third Moscow air hub, in the consolidation project.      The necessity to consolidate and expand Moscow airports was explained by the fast growth rate of passenger traffic, which by 2020 will allegedly result in the Moscow air hub reaching its maximum passenger capacity.    Many experts expressed their doubts about the benefits of this consolidation because centralization always results in monopolism, and it is the existence of three airports that encourages competition between them.   However, corruption is regarded as the driving force behind the Russian state for a reason.  KMO_134935_00177_1_t218The proposed consolidation will result in the appearance of yet another state-owned monopoly valued at tens of billions of dollars and destined to be stripped of wealth and assets by such people as Rotenbergs or Shuvalov.

However, there was a problem with the third Moscow airport, because, unlike the two others, its investor and operator is a privately owned company, Domodedovo International Airport JSC. Thus, the legal battle between the state and Domodedovo International Airport JSC has lasted for years.

It looked like a typical illegal takeover, the risks of which Dmitry Kamenshchik, Domodedovo’s principal owner, openly discussed.    In 2004, the Federal Property Management Agency voiced its concerns about the ownership structure of the airport.   Then, just like it had happened in the Yukos case, legal proceedings were initiated, and courts considered multiple lawsuits. The events around another successful enterprise, Sheremetyevo-Cargo JSC company, are probably linked to the same project of creating a state-owned monopoly.    Questionable arbitration claims, raids of the company’s offices and warehouses by the Russian riot police force OMON, criminal pressure on the company’s management and interference with the company’s work are all signs of pressure the Russian authorities usually put on uncooperative business.

The Federal State Unitary Enterprise Administration of Civil Airports and Airfields (FGUP ACA) that owns 63 airports’ airfields across Russia, serves as the basis of state monopoly in the aviation industry.   The state only leases out airfield infrastructure to airport operators.   FGUP ACA’s statutory mission consists in professionally, effectively and thoroughly serving the interests of the Russian Federation in the sphere of national security and, what is especially amusing, in managing airfield property to guarantee competitiveness of the airport services market.   Under the guise of national security concerns the state keeps a tight grip on all major assets of the aviation industry and seeks to take possession of those few that became privately owned in the 90s. No matter how many beautiful speeches the Kremlin makes on restricting monopolies and guaranteeing competition and how impressive FGUPs’ articles sound, the essence of state-owned monopoly remains the same.    It will always serve the interests of a small circle of corrupt officials that could not care less about how and where from ordinary Russian citizens will fly.

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