Hungary, Russia: Moscow Scoops up a European Airline

Russian state-owned bank Vneshekonombank (VEB) has taken over Malev, Hungary's flagship airline carrier, the Moscow Times reported Jan. 29. Malev, which has been hit hard by the financial crisis, fits nicely into Moscow's agenda of acquiring European airline infrastructure and assets at a discount. The move will not go without dispute from Hungary and the rest of the European Union, but the current economic climate will constrain any attempts to block the deal. Since the financial crisis broke out fully and wreaked havoc on European economies and companies, Moscow has sought strategic assets to purchase across the Continent to increase Russian influence in Europe. But Russia itself has not been spared by the credit crunch, so it is looking for cheap but effective deals. Recent examples range from energy companies to financial institutions, including Russia's purchase of Serbian gas company Naftna Industrija Srbije (NIS) and the takeover of Prominvestbank, one of Ukraine's bigger banks. While these deals have certainly strengthened Moscow's leverage in Europe, Russia has long been especially interested in assets within EU countries, and specifically in the airline industry. The European Union established a single market for aviation known as the European Common Aviation Area in 1990, which has meant that all EU commercial restrictions for non-EU countries (like Russia) on routes, flights, and fares are virtually eliminated for members of the bloc. In order to get a foothold in the European airline industry, Russia and its state airline giant, Aeroflot, originally expressed much interest in purchasing a majority stake of Italy's Alitalia. But Alitalia is Italy's flagship carrier and one of the biggest airlines in the EU, so a deal was blocked given that the Italians and the European Union did not want to see such an influential company in Kremlin hands. So Russia instead has set its sights on Malev, which was at one time the aviation jewel of Central Europe. The Kremlin has since made some back-door moves to acquire the airline. With Hungary in the European Union as well as the Schengen zone (which eliminates the need for visas for travel within the European Union), Malev receives the benefits of being in the European Common Aviation Area (something very attractive to Moscow). With Aeroflot in de facto control over Malev, this gives Moscow greater capacity and cheaper access to Europe-bound flights. Malev, which recently laid off more than 20 percent of its employees as a result of the economic slump, was controlled by two Hungarian businessmen and Russian oligarch Boris Abramovich prior to the takeover announcement. While Abramovich officially owned a 49 percent minority stake in the Hungarian carrier, he actually controlled the majority of the company through anonymous shares, according to STRATFOR sources. Abramovich has recently defaulted on the loans from VEB that he used to finance his ownership in Malev, so now state-controlled VEB is taking over a majority of the Hungarian airline. As a bank, VEB is not experienced in airline management and has decided to cede control to national champion Aeroflot —- a Kremlin move orchestrated by former Prime Minister Viktor Zubkov. These recent developments have been quite disturbing for Budapest. Hungary, a former Soviet satellite state previously targeted by Russia, fought vigorously to keep its energy company MOL from a takeover by natural gas behemoth Gazprom. The European Union and Hungary would like to close Russia out of this deal, and there are discussions ongoing in Hungary about nationalizing Malev to block Moscow from acquiring its flagship carrier. But keeping the airline running will be costly for Hungary, and the necessary financing will be difficult to muster. More broadly, while the opportunity is ripe, Russia will be sure to press on with its acquisition of strategic assets throughout Europe, specifically those it can purchase cheaply. Editor's Note: An error in this analysis as originally published has been corrected.