New Russian Law Pressures Foreign Plane Lessors​

By BK​

What do you need to know this week?

This Monday, Russia passed a law allowing the country’s airlines to list airplanes leased from foreign companies on Russia’s ‘aircraft register’. The new bill was passed in response to Western sanctions imposed against Russia’s invasion of Ukraine.

This move comes after President Vladimir Putin announced Russia’s intention on repossessing all foreign-registered aircrafts within the country and openly discussed nationalising the assets of foreign businesses. As a result, Western companies seeking to recover their planes leased to airlines in Russia are faced with a bleak future. Russian airlines have leased 523 aircrafts from abroad, worth an estimated $10 billion.

Why is this important for your interviews?

The point of re-registering jets in Russia is to keep them operating domestically within Russia. However, current international civil aviation rules prevent registering planes under two host countries simultaneously. Unless Western lessors agree to Russian requests to re-register their jets - which is highly unlikely as they would be unwilling to simply relinquish control of their assets - the new policy will cause a breach of the leasing contracts. It is “illegal to register an aircraft without proof of deregistration from the previous registry [and] without the agreement of the owner.”

Although the legislation does not force airlines to re-register their airplanes without the permission of their owners, it pressures airlines to apply for new registration to keep flying inside Russia. Airline companies are placed in a catch-22: to re-register in Russia would poison relations with powerful foreign aircraft lessors once the crisis is over, but the alternative, i.e. doing nothing, is equally as damaging. The longer a plane is stuck idle in Russia, the greater its depreciation of value. This is because the continuity of maintenance records would be severely disrupted.

Foreign lessors are left with a ticking time-bomb: rapidly depreciating assets. All this is also happening in the backdrop of soaring oil prices which are threatening the cash flow and creditworthiness of all airlines. This double whammy comes at a time where the aviation industry is still recovering from the aftermath of the pandemic.

How is this topic relevant to law firms?

This three-way legal battle between airlines, lessors and insurers caused by this political situation could last decades. Lawyers expect a flood of insurance claims and writedowns, as well as lengthy litigation cases over liability. One major issue that will be contested is who should bear the risk of the aircraft’s depreciating value. For example, older plans may never be returned and are worth less than what their owners may be able to claim in insurance.

The financial consequences of the aircrafts being held in Russia are far-reaching. Such aircrafts are financed in several ways, including funding from banks, leasing companies and investors via securitised debt.

It will be interesting to see how law firms will advise their clients across affected industries, including the aviation, financial and insurance sectors, without their Russian counterparts. Many international law firms have exited Russia or cut ties with Russia-related deals and projects.

In the long-run, law firms will be at the forefront of reshaping and advising how the aviation industry should handle risk. For years, investors have flocked into the industry with the understanding that it could move assets between different countries to escape any regional instability. With the threat of rising insurance premiums and looming litigation, the scope of the contractual provisions on termination and force majeure clauses have come to the limelight once again since the onset of the pandemic.


Image Credit: OlegRi / Shutterstock.com