Sanctions imposed on Russia
Following the invasion of Ukraine, on February 25th, 2022 the EU promptly imposed a new powerful package of restrictive measures in several sectors, particularly defense, energy, aviation and finance. Among others, the aim of the sanctions is to impose a complete export ban on goods and technology used in the aviation industry and prohibit the provision of technical assistance and other aviation related services, including insurance and financial services (aircraft leasing).
It means that it is prohibited to, directly or indirectly:
- sell, supply, transfer or export, any aviation related goods (aircraft, spare parts, engines) for use in Russia;
- provide insurance and reinsurance services;
- provide any repair, maintenance, inspection, technical assistance, brokering services; and
- provide financing or financial assistance/services related to aviation sector in Russia.
Similar measures have been announced by the US and many other countries. Although the EU package of measures is affecting and disrupting the whole aviation sector in Russia, it also has a noticeable financial impact on western counterparties in the aviation business.
Physical and regulatory airworthiness are the most important features ensuring safety in aviation.
The Russian fleet consist primarily of Western-made airplanes. Airbus, Boeing, Embraer and Bombardier have suspended any maintenance support to Russian airlines (including access to online maintenance manuals). Russian authorities are trying to keep the aircraft functioning by allowing third-party companies to maintain commercial passenger aircraft. This in turn creates most serious safety concerns and potentially grave consequences.
As an obvious and direct reaction to that, Bermuda’s Civil Aviation Authority and Irish Aviation Authority have removed all aircraft connected to Russia from their airworthiness registries (most of the aircraft on lease from foreign lessors to Russian airlines were on the Bermuda registry). The registries were no longer able to confidently approve these aircraft as being airworthy. As a response to that, Russia has introduced a scheme where such certification will be done in Russia instead.
Maintenance and spare parts
Russian flag carrier Aeroflot has a total of 187 aircraft in its fleet, out of which 120 are Airbus-manufactured, 59 Boeing-made, and only 10 Russian produced jets.
Without the spare parts supplies from original manufacturers, the required repairs and maintenance are impossible. Aeroflot’s fleet was mainly maintained outside of Russia. According to maintenance experts, it will become very difficult to find certified facilities outside of Russia that will render proper services to Russian aircraft. Reportedly China has already refused to supply Russian airlines with aircraft parts. Lack of certified spare parts, some analysts say, will lead to “cannibalizing” other aircraft on the ground, including those owned by Western lessors.
Termination of leases and repossession of aircraft
According to available data, Russian airlines have 980 passenger jets in service, of which approximately 500 aircraft, with an estimated market value of about $10 – 12 billion, are on lease from foreign firms (mainly Ireland-based lessors). Under the sanctions, the lessors have until March 28th to terminate the lease agreements, which will lead to a nearly impossible effort to recover and repossess aircraft from Russia. It is reported that Russian firms already are ignoring lessors calls about repossession of aircraft.
Russia has passed a law (amendments to the Russian Air Code) effectively allowing the Russian firms to register foreign-owned leased planes with the Russian register without any consent or involvement from the aircraft owners. In addition, lease payments could be settled in the local currency (roubles) and Russian insurers can provide insurance. If a lessor decides to terminate the lease agreement, a special governmental body will decide whether the plane would be returned to the lessor or not.
Implications to the aviation insurance market
It may be presumed that such deprivation of assets is covered by insurance. However, the aviation insurance conditions do not provide clear answers whether the losses caused by termination of leases due to sanctions and inability to recover aircraft due to recent Russian legislation are enough to trigger an insurance claim. Experts believe that as the EU sanctions prohibit to provide aviation insurance for use in Russia, the insurers may be expected to rely on this as suspending coverage to the leasing companies. The question of how the impact of sanctions and the newly introduced Russian legislation should be interpreted will unavoidably lead to extensive litigation.
The price to be paid
The sanctions will inevitably cut the Russian aviation sector off from the rest of the world for years. The lack of spare parts, proper maintenance and expertise, if not entirely bringing down Russian aviation, will have most severe consequences to their aviation safety and aircraft values. Western lessors will undoubtedly face heavy losses as well, so will aviation insurers and re-insurers. This will also be part of the price of the sanctions on Russia brought upon by its military aggression against Ukraine.