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What the Latest EU Sanctions Derogation Means for Aircraft Lessors

Industry - Airlines and Aviation

Through Council Regulation (EU) 2022/328 of February 25, 2022, the European Union introduced new sanctions relating to, among other things, Russian aggression in Ukraine. The regulation amended Regulation (EU) No 833/2014 to introduce a raft of new prohibitions, with the new Article 3c most relevant to aircraft leasing and financing. Pursuant to Article 3c, among other things, it has been prohibited since February 26, 2022 (or March 28, 2022 to the extent that contracts were concluded prior to February 26, 2022) to:

  • sell, supply, transfer or export, directly or indirectly, aircraft;
  • provide insurance and reinsurance, directly or indirectly, in relation to aircraft;
  • provide repairs, inspections, or modifications or defect rectification of an aircraft; or
  • provide financing or financial assistance related to any sale, supply, transfer or export of aircraft,

to any person, entity or body in Russia or for use in Russia.

In a series of Frequently Asked Questions published by the European Commission in March of 2022, it was clarified that the provision of insurance or reinsurance to leasing companies for aircraft and engines subject to operating or finance lease arrangements signed before February 26, 2022, including when such aircraft or engine is used in Russia or leased to a Russian person, was allowed until March 28, 2022.

Council Regulation (EU) 2022/576 of April 8, 2022 introduced additional provisions to Article 3c permitting the national competent authorities* to authorize, under certain conditions, the continuation of aircraft finance leases entered into before February 26, 2022 to allow lease re-payments to persons within the EU, provided that no economic resources are being made available to the Russian counterpart, with the exception of the transfer of ownership of the aircraft after full reimbursement of the finance lease.

In May and June 2022, the Commission shed some light on the phrase “for use in Russia” in Article 3c when it published additional FAQs which noted that the wording is a standard formulation used to avoid the circumvention of sanctions as it ensures that products and services sold or supplied to third country persons, but to be used in Russia, are also prohibited. In making this clarification, the EU distinguished the provision of insurance in the context of (x) an international flight in and out of Russia by a non-Russian airline, which is not caught by the prohibition as it is not for “use in Russia” but part of the normal international services provided by an airline and (y) domestic flights between two points within Russia, which would be prohibited.

On December 16, 2022, the Council of the European Union introduced Council Regulation (EU) 2022/2474 which introduced a new package (the 9th) of sanctions against Russia and included a number of derogations from the existing sanctions. Pursuant to new Article 12b, national competent authorities can now authorize (until September 30, 2023) the sale, supply or transfer of items that are the subject of an existing sanction (including aircraft), where such sale, supply or transfer is strictly necessary for the divestment from Russia or the wind-down of business activities in Russia, and provided that:

(a) the items are owned or controlled by EU persons, entities or bodies;

(b) the competent authority has no reasonable grounds to believe that the item might be for a military end-user or have a military end-use in Russia; and

(c) the items were physically located in Russia before the relevant prohibitions entered into force.

In the EU’s most recent round of FAQs, some helpful additional clarity was provided in the context of lessors’ contingent and possessed insurance policies. The EU confirmed that insurance and reinsurance of aircraft are not “for a person in Russia or for use in Russia,” where it is provided for the benefit of the non-Russian owner of those goods and not for the benefit of the actual user or operator of the goods. This applies also when the items remain in Russia against the will of their non-Russian owner and despite the latter’s demand for their return (including “lost aircraft”).

Furthermore, it confirmed that in the case of “lost aircraft,” it is not prohibited for the non-Russian owner of the aircraft to execute an insurance settlement with a Russian entity leading to the payment of the market value of the lost aircraft by the latter, provided that:

(i) the lost aircraft were in Russia before March 28, 2022, on the basis of a contract entered into prior to February 26, 2022;

(ii) the subscription of the applicable insurance policy predates the sanctions;

(iii) the owner promptly requested the return of the aircraft and did anything reasonably possible to repossess the aircraft but was unsuccessful;

(iv) no additional goods prohibited by Article 3c or any other sanctions provisions will be made available to a person, entity or body in Russia or for use in Russia; and

(v) no sanctioned person is involved in, or may draw any benefit from, the execution of the settlement.

The reference in (iv) to no additional goods would appear to allow for salvage rights to be transferred to Russian insurers as part of an insurance settlement.

It would seem unrealistic to expect Russian insurers to settle claims with non-Russian owners but these clarifications will make it difficult for reinsurers and providers of contingent & possessed insurance policies to non-Russian lessors to argue that an AVN 111 sanctions and embargo clause automatically cancelled those policies once the EU sanctions came into effect.

On the other hand, owners who have received purchase offers from Russian airlines in respect of lost aircraft need to consider whether there are steps that they could be taking now to mitigate their insured losses. Of course, those steps necessarily implicate a myriad of existing sanctions regimes unaffected by the EU’s latest FAQs.

*The national competent authority in Ireland is the Department of Foreign Affairs.

If you would like any additional information or want to discuss further, please do not hesitate to contact the author, David Berkery, or one of our aviation sanctions group, David Johnson, Elizabeth Krabill McIntyre, Louise Woods, Elena Guillet or Niels Jensen.

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.