Moscow orders airlines to hold leased planes hostage amid growing sanctions

posted on 16th March 2022 by Eddie Saunders
Moscow orders airlines to hold leased planes hostage amid growing sanctions

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The Kremlin today threatened to impound the aircraft leased to Russian airlines, casting doubts over the fate of 780 planes worth a total of $10bn.

According to a draft law proposed by the Russian transport ministry, carriers should be required to pay leases in rubles for the whole of 2022, de facto allowing them not to return the aircraft if payments are not accepted or the lessor terminates the agreement.

Under the proposed law, the Kremlin would entrust a government commission to decide whether to return the plane or not.

The government has also asked the State Duma to allow foreign planes leased by Russian airlines to be registered as the airlines’ property and give them airworthiness certificates.

Moscow’s decision comes as a sea of repos hit the country’s aviation industry, following the West’s decision to ban Russian airlines from its airspace, putting pressure on lessors such as Ireland’s AerCap and Shanghai-based BOC Aviation to cease deals.

Among the first ones to cut ties with Moscow, BOC Aviation said insurance policy cancellations could affect its 18 planes leased to Russian carriers, which have a total value of $935m.

“The international aviation insurance markets are progressively cancelling certain elements of insurance policies in relation to aircraft located in Russia or leased to Russian airlines,” the company said in a statement. “This is a complex and rapidly developing situation that we are monitoring closely.”

Most airlines don’t actually own their fleet, but lease them long-term from companies such as AerCap and BOC Aviation.

Under normal circumstances lessors are protected by the 2001 Cape Town Convention, which regulates transactions involving movable assets such as aircraft and space assets.

The convention, which states that airlines should return aircraft with the minimum interference in case of default payments, was signed by Russia in 2011.

“Cape Town is focussed on the rights of aircraft owners in cases of default payments, however, not international sanctions, and given Russian carriers have generally had a very good record of making lease payments, it is unclear if the Cape Town convention, to which Russia is a signatory state,” David Warnock-Smith, professor of aviation management at Buckinghamshire New University told City A.M.

According to analysts, the flood of claims could bring the situation to a stalemate, tying lessors and airlines in year-long legal disputes.

“A stalemate type situation is very possible, making it difficult for western aircraft leasing companies to fulfil their obligations under economic sanction orders,” Warnock-Smith said, adding that would lead to increased leasing rates.

“Those companies with greater exposure may be the most likely to try to increase lease rates to try and compensate for losses in the short-term,” he said. “Insurance premiums for aircraft leasing companies will also likely increase if it proves difficult for repossessions to take place in a timely manner.”