DALLAS – Russia has drafted a law that may bar its airlines from returning leased planes, raising the stakes in a battle with Western financiers over US$10bn in aircraft.
According to Reuters, sanctions imposed after Russia’s invasion of Ukraine give leasing companies until March 28 to get out of contracts with Russian airlines, setting off a cat-and-mouse game as lenders scramble to reclaim planes – with limited success.
Russian airlines will settle leases in roubles throughout 2022, according to the proposed law designed by the transport ministry. If a foreign lessor discontinues the pact, a special government committee will determine if the aircraft are to be returned or must remain in Russia.
“It’s a lousy offer coupled to an even worse offer,” said Eddy Pieniazek, head of analytics and advisory at aviation consultancy, Ishka in the United Kingdom.
Since Russia dispatched soldiers into Ukraine on February 24, provoking Western sanctions, the rouble has dropped by roughly 30%. Leasing contracts are valued in US dollars, which is the currency in which the leasing business, which is primarily located in Ireland, acquires and purchases planes.
If contracts are canceled, the Cape Town Convention requires airlines to return aircraft with little intervention, which Western sources claim is not happening, despite Russia’s insistence that the sanctions are unjustified.”Cape Town should be involved, implying a smooth aircraft recovery operation. What they’re proposing is that all of the aircraft’s contracts be broken “Pieniazek remarked.
Global Leasing Mass Default
Sanctions have already blocked off Russia’s procurement of most aircraft and parts, forcing many international flights to be canceled for fear of their aircraft being confiscated by foreign lessors or banks. They’ve also frozen a large portion of Russia’s foreign reserves, forcing authorities to explore measures to halt withdrawals of foreign cash.
The dispute threatens the world’s biggest mass default for the global leasing business, which possesses over 50% of the world’s airliner fleet, albeit the immediate impact is eclipsed by global groundings in the COVID-19 situation. Experts fear the subsequent wave of claims might spark a decade-long court struggle between lessors and insurers over whether or not war-risk insurance will payout.
Lessors are concerned that the crisis may lead to the cancellation of insurance contracts due to a lack of clarity on what will happen next, and are expected to postpone taking writedowns until it is clear whether they will be compensated. BOC Aviation, which leases 4.8% of its assets to Russian airlines by book value, was one of the first lessors to express insurance worries on Thursday.
With its findings, it stated, “The international aviation insurance markets are gradually canceling some components of insurance contracts in respect to aircraft situated in Russia or leased to Russian airlines.”
“We’re keeping a close eye on this complex and rapidly evolving scenario.”, they added. Russian airlines have leased about 780 planes in total, including 515 from international lessors.
According to consultants Ascend by Cirium, 425 of these are at more risk right now. According to industry data, the world’s largest lessor, Dublin-based AerCap, has the largest exposure by a number of units, with 152 planes rented to Russian carriers. On Thursday, it declined to comment on the draft law but said on Feb. 28 that about 5% of its fleet was on lease to airlines in Russia and that it would discontinue operations there.
Featured image: Aeroflot Boeing 777-300ER. Photo: Kochan Kleps/Airways