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Key Questions About Aircraft In Russia

Industry - Airlines and Aviation

Since February 24, 2022, Russia’s invasion of Ukraine has led to unimaginable human suffering, a growing refugee crisis and a rising death toll. The invasion sparked a global response as governments moved to sanction the Russian economy. Sanctions from the EU, UK and US have disrupted business with Russian and non-Russian counterparties in the aviation industry, specifically in the aircraft leasing, financing and insurance markets. While the impact of these sanctions is still developing, below we have provided responses to some of the questions most frequently asked by our clients.


Q: How do the recently imposed sanctions impact aviation leasing and financing?

A: Recent US, UK and EU sanctions prohibit transacting certain business with certain individuals and entities in Russia, Belarus and Ukraine. These sanctions apply both directly and indirectly, and cover an entity owned or controlled by a sanctioned individual or entity.

Regulation (EU) 2022/328 Article 3c is particularly relevant to the aviation industry, and it states:

It shall be prohibited to sell, supply, transfer or export, directly or indirectly, goods1 and technology suited for use in aviation or the space industry…whether or not originating in the Union, to any natural person, entity or body in Russia or for use in Russia.

Accordingly, for a lessor based in the EU or with operations in the EU, Article 3c prohibits leasing an aircraft to Russian entities or Russian-owned or controlled entities, with March 28, 2022 being the deadline imposed by the European Union for all impacted lessors and financiers to terminate their contracts with effected Russian counterparties. Lessors subject to EU jurisdiction should also exercise caution when leasing aircraft to non-Russian lessees who may be flying into Russia, as discussed further below.

In the US, in addition to the expansive sanctions designations recently made by the Department of the Treasury’s Office of Foreign Assets Control (OFAC), the Department of Commerce’s Bureau of Industry and Security (BIS) issued a notice on March 18, 2022 declaring a number of aircraft in violation of the Export Administration Regulations (EAR). The EAR prohibit the export, re-export and transfer (in-country) without a license to Russia of aircraft, parts and related components subject to US export jurisdiction. Beyond the more obvious implications for manufacturers and MROs, there is a risk for lessors leasing to a lessee (even non-Russian) who flies an aircraft subject to US jurisdiction in and out of Russia. The airline, but also the lessor, could run afoul of the EAR, and the lessor would be well advised to take steps under its lease to prevent such activity. While the March 18 notice only announced violations relating to 100 Boeing and Gulfstream aircraft owned or leased by Russian carriers or individuals, it remains to be seen whether the BIS will issue violation notices more broadly. For instance, BIS’s license requirement applies to flights into Russia by both US-origin aircraft and non-US manufactured aircraft with more than 25% of US-origin controlled content whether the lessee or lessor is Russian or non-Russian. In addition, providing any form of service, including from abroad, to the 100 identified aircraft requires a license from BIS, regardless of the nationality or location of the service provider. The EU and UK sanctions also include prohibitions on providing maintenance and technical service to aircraft in Russia, along with the export of spare parts to Russia. Furthermore, the sanctions regimes restrict dollar reserves and the ability of western banks to accept payments from Russia, effectively cutting off rent or sale payments from cooperative lessees.

Q: Can non-Russian airlines continue to operate flights in and out of Russia?

A: All operators, airlines and lessors (of any nationality or location) need a BIS license to fly aircraft that are subject to US export jurisdiction into Russia—and as noted above, this includes not just US-origin aircraft but also certain non-US-manufactured aircraft.  On its face, Article 3c also appears to prohibit flights into Russia, as an EU lessor leasing to such an airline would be considered supplying a good for use in Russia. Accordingly, the conservative approach would be to ensure that the lessee ceases any operations into or within Russia, and a number of our lessor clients based in the US, UK and EU have already done so, relying on provisions in their lease agreements. It will be important to keep a good, clear paper trail showing that lessors and financiers are taking steps to ensure that their airline customers are not flying into Russian airspace.

Q: Can US, UK or EU owned aircraft fly through Russian airspace without violating US, UK or EU sanctions?

A: No. An EU aircraft flying through Russian airspace would likely run afoul of Article 3c. While it is less clear whether a US or UK aircraft flying through Russian airspace would violate US/UK sanctions, Russian airspace is closed to aircraft from each of the US, UK and EU in any event.

Q: Can aircraft leased to Russian entities be recovered by lessors and exported out of Russia? 

A: While repossessing a Russian-operated aircraft that is outside of Russia is possible with cooperation from local aviation authorities, as a practical matter aircraft within Russia have not been recoverable to-date (especially in light of Russia’s March 14, 2022 bill concerning re-registry, which is discussed below) and are at risk of losing significant value as access to MRO facilities and parts is restricted, access to aircraft records is questionable and airworthiness monitoring by registries such as Bermuda and Ireland have terminated, as further discussed below. Although Russia is party to the Cape Town Convention, the Russian authorities have taken numerous actions which are in direct contravention to the treaty (and other international aviation conventions). Russia recently enacted a law allowing Russian airlines to register aircraft leased from foreign companies on Russia’s aircraft register in violation of international law. Even if an individual airline wants to cooperate with a lessor, the structural obstacles put in place by the Russian authorities and the recent sanctions targeting Russia make recovery extremely challenging.

Q: Will the inability to export aircraft from Russia (and the subsequent re-registration of aircraft in Russia) impact an aircraft’s value?

A: Yes. As discussed above, aircraft within Russia have been cut off from access to MRO facilities in and spare parts manufactured in sanctioning countries. Without the availability of parts and maintenance, there is also a risk that certain aircraft will be cannibalized to provide parts for other aircraft. Furthermore, foreign access to aircraft maintenance records, which are crucial for validating and maintaining aircraft value, is questionable. Without access to maintenance records (which are normally stored by airlines) and to the extent an affected aircraft continues operating in Russia, the value of the aircraft will diminish over time and become difficult to ascertain.

Given the uncertainty of the maintenance status of aircraft located within Russia, authorities in Ireland and Bermuda, where nearly all foreign-owned aircraft operated by Russian lessees are registered, have suspended airworthiness certificates of such aircraft. This means that airworthiness of the affected aircraft will no longer be monitored by Bermudan or Irish aviation authorities—something that gave comfort to lessors to Russian airlines in the past. In response, Russian authorities passed a bill on March 14, which allows domestic Russian airlines to place the aircraft on the Russian registry, and without necessarily deregistering the aircraft from its original state of registration. It remains to be seen the extent to which Russian airlines will reregister foreign-leased aircraft pursuant to the bill, but a number of foreign-owned aircraft are reported to have been registered in Russia already. Continued operation of the aircraft would, in addition to violating international law regarding multiple states of registration, result in loss of value considering the maintenance concerns described above.


Q: Will insurance cover aircraft stranded in Russia?

A: The primary aircraft insurance is typically held by the operator of the aircraft. For Russian-operated aircraft, insurance was generally provided by Russian insurers with almost full reinsurance coverage from the London or international market. Russian insurers may not pay out to Western lessors, whether due to unwillingness or inability to transfer funds abroad, and Article 3c and The Russia (Sanctions) (EU Exit) (Amendment) (No. 6) Regulations 2022, Regulation 29A have led to reinsurance policies held by Russian carriers in the EU and UK markets being terminated. Any claims filed under these policies prior to their termination may still be valid, however this will be a fact and policy-specific analysis and recovery is questionable.

Lessors may however be able to recover under their contingent/possessed insurance policies. These policies are purchased by lessors to cover situations where the operator’s policy falls short. Contingent policies often include war risk coverage in addition to hull insurance.

Q: How likely are claims made under contingent/possessed insurance policies to succeed?

A: This will depend on the language of individual policies, as well as the fact patterns for particular aircraft, as insurers will seek to minimize claims and, in at least some cases, have sent notices of termination. A key issue will be whether claims fall under hull insurance policies (which cover theft of an aircraft) or war risk policies (which would cover government confiscation). No strong consensus has emerged on this question, and the extent of insurance coverage may need to be determined through litigation. Any recovery under a lessor’s war risk policy may be subject to an aggregate cap in the lessor’s policy.

Q: What changes will there be to insurance coverages going forward, especially in other “high risk” markets?

A: Industry sources, including Fitch, believe that aviation insurers and reinsurers should weather any claims stemming from the Russia situation without depleting their capital or suffering a ratings downgrade. That said, the aviation insurance market is highly concentrated (especially for war risk) and some insurers and reinsurers may choose to exit the aviation space as a result of Russia-related losses. Even insurers who do not exit the space may raise premiums and include additional exclusion clauses.

Please reach out to Niels Jensen or David Berkery for more detail about any of the topics above or if you have any other queries.

1 Note – “Goods” includes aircraft and aircraft parts.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.