By Tim Hepher and Jamie Freed
(Reuters) – Russia on Thursday released a bill that could prevent its airlines from returning leased planes, raising the stakes of a showdown with Western finance over more than $10 billion worth of planes.
Sanctions imposed after Russia invaded Ukraine give leasing companies until March 28 to free themselves from deals with Russian airlines, setting off a game of cat and mouse as lenders attempt to retrieve the jets – with very little success.
Under the bill drafted by the Transport Ministry, Russian airlines will pay leases in rubles throughout 2022.
If a foreign lessor terminates the contract, a special government commission must decide whether the aircraft can be returned or decide that the aircraft should remain in Russia.
“This is a bad deal tied to an even worse deal,” said Eddy Pieniazek, head of analytics and consulting at Ishka, a UK-based aviation consultancy.
The ruble has plunged about 30% since Russia sent troops to Ukraine on Feb. 24, prompting sanctions from the West.
The leasing contracts are denominated in US dollars, the currency in which the leasing industry, mainly based in Ireland, typically borrows money and pays for aircraft.
If the contracts are terminated, an international treaty called the Cape Town Convention calls on airlines to return planes with minimal interference, which Western sources say is not happening, although Russia insists that the penalties are inappropriate.
“Cape Town should come into play, which means an orderly process of recovering the planes. What they’re suggesting is breaking the terms of the contracts for all the planes,” Pieniazek said.
Sanctions have already cut off the supply of most planes and parts to Russia and forced its carriers to cancel many international flights lest their planes be seized by foreign donors or banks.
They also froze a large part of Russia’s foreign exchange reserves and forced the authorities to look for ways to limit the outflow of foreign currency.
For the global leasing industry, which owns more than half of the world’s jetliner fleet, the standoff risks what experts have described as its biggest mass flaw, though the immediate impact is overshadowed by global groundings in the COVID-19 crisis.
The resulting flood of claims could trigger a decade-long legal battle between lessors and insurers amid uncertainty over the profitability of war risk policies, experts say.
Lessors fear the crisis could lead to the cancellation of insurance contracts in the absence of a clear plan for what will happen next, and are likely to delay write-downs until it is clear s they can be compensated.
On Thursday, BOC Aviation, which has 4.8% of its assets by book value leased to Russian airlines, became one of the first lessors to voice insurance concerns.
“International aviation insurance markets are gradually canceling certain elements of insurance policies relating to aircraft located in Russia or leased to Russian airlines,” it said in its results.
“This is a complex and rapidly evolving situation that we are monitoring closely.”
In total, nearly 780 jets are leased by Russian airlines, including 515 from foreign lessors.
Some 425 of them are most at risk, according to consultants Ascend by Cirium.
The world’s largest lessor, Dublin-based AerCap, has the largest exposure by number of units with 152 planes leased to Russian airlines, according to industry data.
It declined to comment on the bill on Thursday, but said on Feb. 28 that about 5% of its fleet by net book value was leased to airlines in Russia and it would cease operations there.
(Reporting by Reuters; Editing by David Goodman and Mark Potter)