Caught between a rock and a hard place:
Foreign owners of Aircraft based in Russia
Following Russia’s invasion of Ukraine on the 24th February, there was strong international condemnation of the attack and fresh sanctions from the West. Aircraft lessors based in the European Union were given a month’s notice to terminate their lease contracts with Russian operators, to comply with EU sanctions which will come into effect on the 28th March 2022.
Almost all Western owned aircraft in Russia are registered offshore, primarily in Bermuda and Ireland. Both registries have revoked airworthiness certificates of these aircraft, citing that they no longer had the ability to oversee the safety of them.
The EU also moved to immediately restrict the provision of insurance and reinsurance to Russian entities from the 26th February, a move adopted by the UK on the 3rd March.
In a move widely seen as retaliatory to the upcoming sanctions on leased aircraft, President Putin signed a new law this week. Under the new legislation, if a foreign lessor terminates the lease, hand back of the aircraft will only be allowed with the approval of a Russian government special committee. Furthermore, the law provides that cancelling the lease will enable the aircraft to be re registered, insured, overseen and operated under Russian civil Aviation rules, and provision will be made to change ownership of the aircraft.
The ramifications are obvious: Western based lessors are caught in an impossible situation, being required to terminate leases to avoid falling foul of sanctions, in the full knowledge that in doing so, their aircraft are surrendered to Russian state control. They face the loss of their assets in Russia for as long as the invasion continues and sanctions remain in place.
What We Know So Far: Timeline Summary since 24th February 2022
Mission Impossible: Western Lessors with Exposure to Russian Operators
VesselsValue’s fleet database records 833 commercial passenger narrowbody and widebody aircraft in service with Russian airlines with a total value of $15 billion. 771 of these aircraft are Western built, and over half are leased from Western lessors.
Exposure varies, from AerCap (over 150 aircraft, 5% of their total fleet) to lessors such as Macquarie, Standard Chartered and Jackson Square where there is no direct exposure.
It’s a race against time for lessors: they face the Herculean task of terminating leases and repossessing every single one of these aircraft by the 28th March deadline.
Even under the friendliest of circumstances it can take months to repossess an aircraft. In this instance an entire sector has one month to retrieve hundreds of aircraft where the operators’ consent is now a matter of decidedly unfriendly Russian state law; and flight bans into and out of Russian airspace make logistics next to impossible.
As a result, Western lessors have very few options. The sanctions do not appear to allow them any room to manoeuvre in terms of continuing the lease or receiving payments, either in US dollars or, as the Russian law provides, in Rubles. Even if they could, Russia’s isolation from the SWIFT payment system makes it difficult to conceive of an alternative acceptable mechanism; and in any event the Ruble’s current exchange rate of 1 RUB = 0.0082 USD has dropped by 30% since Russia invaded Ukraine, significantly heightening Russian lessees’ financial credit risk.
The long and short of it is that Western lessors are most likely facing a total loss of their assets.
Through the Other End of the Telescope: Russian Lessors’ Exposure to Western Operators
VesselsValue’s database records a total of 297 commercial in service aircraft owned by Russian entities with a total market value of $4.7 billion, of these aircraft over 180 are owned by Russian lessors.
We are tracking the exposure of Russian lessors leasing to non Russian airlines. There are a handful of Russian lessors with 11% of their combined total fleet size worth over half a billion dollars in aircraft value, on lease to non Russian operators:
Source: VesselsValue Database as of 16th March 2022.
The most notable exposure is to Air Canada Rouge with four A321s (MSN 6232,6210,5733,5681) with an average age of 7.9 years in active operation and a market value of around USD 100 million, as well as one 737 with British airline Jet2.com (MSN 34702, also remains in active operation).
Looking Ahead: What Comes Next?
The effect of Western sanctions will stem primarily from the enforced cancellation of leases and insurance, the ban on SWIFT payments into and out of Russia, and the cessation of parts and maintenance service provision.
We expect the Russian Aviation sector will become increasingly isolated, and, depending on how long hostilities continue, could turn back the clock to Soviet style circumstances; or become comparable to Aviation in places like Iran or Cuba. Even if hostilities cease in the near future, we expect it will take a significant passage of time before Western lessors and investors have the risk appetite for the Russian Aviation market.
Turning to the West, lessors’ insurance claims, the legal challenges of aircraft ownership and retrieval, and the extent of these ramifications, will only be realised once EU sanctions affecting Aviation come in to play after the 28th March. Resolution could take years. VesselsValue will continue to monitor events closely and provide insight as events unfold.