EU SANCTIONS ON RUSSIAN AVIATION

On 26 February 2022, in response to Russia's invasion of Ukraine, Regulation (EU) 2022/328 of 25 February 2022 (the Regulation) came into force. The Regulation introduces broad new sanctions on Russian airlines, the Russian aviation sector (including aviation insurance) and certain related activities, entities and persons. 

Irish lessors and all other EU-based lessors (Lessors) are directly affected by the Regulation – as are all other EU persons and entities, such as EU-based insurers and MROs. 

Lessors should terminate aircraft leases into Russia by 28 March 2022

The Regulation (quoted below) requires Lessors to terminate affected aircraft leases entered into before 26 February 2022 by 28 March 2022. 

Affected leases include all leases to Russian airlines, persons and entities, and possibly leases to others where the aircraft is operated in Russia. 

Article 3c

1. It shall be prohibited to sell, supply, transfer or export, directly or indirectly, goods and technology suited for use in aviation or the space industry, as listed in Annex XI, whether or not originating in the Union, to any natural or legal person, entity or body in Russia or for use in Russia.

Grounds for termination

Absent other defaults, such as a payment default, the most likely contractual grounds for Lessors to terminate such leases are likely to be specific sanctions-related events of default/covenants, illegality termination provisions or relevant events of default, breach of the insurance provisions, or breach of the lawful and safe operation and maintenance provisions. 

This is because: 

• the Regulation (quoted below) prohibits EU insurers from providing insurance or reinsurance in respect of aircraft operated by Russian entities or which are used in Russia. Unlike the requirement to terminate leases, this prohibition came into effect on 26 February 2022. Most Russian-operated aircraft are insured domestically with reinsurance in the international markets;

Article 3c

2. It shall be prohibited to provide insurance and reinsurance, directly or indirectly, in relation to goods and technology listed in Annex XI to any person, entity or body in Russia or for use in Russia.

• wider EU and other sanctions on Russia have hit the Russian economy hard and prevent Russian-operated aircraft from flying in EU and US airspace.  There are also moves to exclude certain Russian banks from the SWIFT payment system for most purposes;  
• the Regulation prohibits the supply of aircraft parts or MRO services to Russian airlines or in relation to aircraft used in Russia – and a Russian operator will not be able to fly its leased aircraft to, for example, an MRO based in Germany; and
• the US, EU, Canada, the UK and others are steadily increasing economic sanctions on Russian entities and sectors as the conflict with Ukraine continues.

Repossession unlikely to be swift or easy 

Once affected leases have been terminated, there may be a long and hard road for Lessors to successfully repossess their aircraft.  Given political considerations, it cannot be assumed that Russian airlines will (or will be able to) cooperate and voluntarily hand back their leased aircraft – or that the Russian authorities would cooperate in allowing such aircraft to be exported from Russia.

It is beneficial that the vast majority of affected aircraft are registered in Bermuda or Ireland under Article 83bis arrangements, mitigating de-registration risk, and meaning that the Russian authorities will not be responsible for issuing Export Certificates of Airworthiness.

To the extent physical repossession is not achievable in the near term, a consensual agreement for airlines to park aircraft in short-term storage (following the manufacturer's recommendations) may be the only practical option in some cases. Separate storage/safeguarding agreements should be considered. However, sanctions advice should be taken on these options, including whether a licence from the EU authorities to go ahead with these arrangements might be necessary and obtainable. 

Stranded assets- cannibalization and insurance

If aircraft cannot be flown out of Russia, the risk of cannibalisation of stranded aircraft arises. Russian operators, cut off from supplies of parts and MRO services from the West, may cannibalise aircraft to keep as much of their fleet operational as they can, both domestically within Russia and in the other parts of the world in which they can still operate. It appears likely that the Regulation will prevent Lessors from engaging CAMO and other technical services for stranded aircraft in Russia, in order to mitigate this risk. Again, it would be prudent to take sanctions advice on this issue, including whether the EU authorities might grant a licence to obtain such services.

As noted, EU insurers' coverage ceased to be effective on 26 February 2022. Lessors must urgently check their contingent and possessed policies (some of which may already be on-risk) to determine how their aircraft are covered now, and will continue to be covered post termination of the lease.

The probation on financing or providing financial assistance

Lessors should note that the Regulation prohibits providing finance or financial assistance relating to aircraft to any person, entity or body in Russia or for use in Russia. To reduce the risk of an inadvertent breach of this prohibition, it would be prudent for Lessors to obtain advice on its likely construction. Sanctions on providing finance have had surprisingly wide meanings in the past.

Repossession

It seems likely that the Russian government might directly prohibit Russian operators from allowing Lessors to repossess aircraft and/or requisition and nationalise them, specifically where the aircraft are leased by Aeroflot or other state-controlled operators. Although, by Russian law, the government must pay compensation for each such appropriation, it is likely that such compensation would be low, if paid at all. The likelihood of such a development has increased as the State Duma is in the process of unfreezing a draft law dating back to 2018 on criminal liability for compliance with anti-Russian sanctions.