Daniel Powell examines the impact of sanctions against Russia on the aviation industry in The Legal Diary

March 31 2023

Daniel's article was published in The Legal Diary, 31 March 2023, and can be found here.

The Ongoing Impact of Sanctions against Russia on the Aviation Industry

The sanctions imposed on Russia have caused significant disruption to the aviation industry.  Prior to the Ukraine conflict, Russia was a fertile market to enter into lease agreements and partnerships. Sanctions have now brought these aviation dealings with entities connected to Russia largely to a halt.

UK companies are prohibited from entering into transactions with Russia to supply aviation equipment and partnerships with Russian airlines have been banned. Monies and aviation equipment allocated for a transaction between UK and Russian businesses prior to the war therefore now must be directed elsewhere.

It is particularly problematic for UK companies holding existing lease agreements with those Russian entities impacted by sanctions. UK companies are prevented from supplying aircraft and parties cannot perform their contractual obligations to comply with the terms of an existing lease. This has led to significant tension and difficulties for companies to depart from an existing commercial agreement. For those lease agreements with arbitration clauses, this is complicated further by a Russian Supreme Court decision last year deciding that the Russian Arbitrazh courts would have exclusive jurisdiction over commercial disputes impacted by sanctions, regardless of a contractual provision of a different forum.

To muddy the waters further, a Russian law implemented and signed by President Putin in March last year, which permits Russian airlines to register foreign owed aircraft as Russian owned, still stands. This development has substantially added to the difficulty of leasing companies retrieving foreign aircraft from Russian parties and foreign aircraft therefore continue to be operated by Russian airlines without the consent of the manufacturer or lessor of the aircraft.

What is more problematic, particularly for aircraft manufacturers, is that Russian connected operators rely on foreign countries for aircraft resources and maintenance services. Now that sanctions limit the supply of these services, this raises safety concerns for aircraft which are under equipped or insufficiently serviced. An incident involving one of these foreign aircraft, even if beyond the control of the aircraft manufacturer, may still have a devastating impact on the aircraft manufacturer and its reputation.

An additional grievance is that insurance arrangements for both aircraft manufacturers and leasing companies are further complicated by the prohibitions imposed by sanctions. In an ongoing UK High Court dispute, insurers are disputing that Russian seizure of aircraft is a loss under the insurance policy.

Due to the wide breadth of sanctions, aircraft lessors unfortunately have limited actions available to them to remedy or mitigate the losses arising from the disruption to lease agreements with parties connected to Russia. It remains to be seen in this tense global political climate if other nations will be drawn into the conflict, which would complicate the situation and multiply the issues facing the industry.

Industry participants will seek to draw lessons from this recent experience. In lease agreements with other non-UK companies, that are not currently impacted by sanctions, a clause could be inserted accelerating the period for leased aircraft to be returned upon termination of the lease, in the event of military conflict. In addition, considering the ongoing UK High Court dispute, insurance policies should be reviewed to capture a range of possible risks associated with sanctions measures and government imposed counter measures.

Including at least some further certainty in lease agreements and insurance contracts may help to avoid more confusion in the future should the existing conflict escalate further.

Back to Blogs & Insights