Russia Sanctions Year in Review: Impact on Aviation Sector
This post marks the third entry in our Year-in-Review series. For prior posts, click here.
Many of the first measures that the United States, European Union and United Kingdom collectively took against Russia in 2022 related to aircraft and international air travel. As the conflict broke out, each jurisdiction quickly prevented Russian actors from entering their airspace. Over the past year, export controls on the aviation industry and sanctions on companies that support the Russian aviation sector have grown increasingly complex. Those rules have also been applied to Russia’s ally, Belarus. Meanwhile, Russia has imposed a number of significant countermeasures in order to keep aircraft within Russia. Below, we explore how key sanctions on Russia have affected the aviation industry.
Immediately following the start of the conflict, the U.S., EU and UK each imposed expansive export controls on items related to the aviation industry, in the form of requirements to obtain advance permission (licenses) prior to export to Russia. The United States asserts jurisdiction even over non-US made aircraft and parts that contain certain levels of U.S-origin content.
On February 24, 2022, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) imposed broad controls on aviation-related items, including a license requirement for the export or reexport to Russia of controlled aircraft parts
Under the U.S. rules, the operation of aircraft on international commercial flights either is permitted, or is authorized in most cases under “License Exception AVS” provided that ownership or control is not transferred while an aircraft is in a restricted country. In early March of 2023, the United States revoked eligibility under License Exception AVS for all aircraft registered in, owned, or controlled by (including under leases) by Russian airlines or individuals. As a result, any U.S.-origin aircraft or non-U.S. origin aircraft with U.S. content above the “de minimis threshold” is subject to a license requirement if it is Russian-owned, operated, or leased and is flown into Russia. Commercial flights into Russia by non-Russian airlines are still permitted. The United States also requires a license for divestment and other activities related to recovering aircraft from Russia, although reportedly BIS has been issuing such licenses with some regularity.
On February 25, 2022 and March 7, 2022 respectively, the EU and the UK each adopted a ban on the export of aircraft and other aviation and space items (including engines, spare parts and technology) to or for use in Russia, as well as certain related financial and technical assistance and other services. These measures had a significant impact on the EU’s aircraft leasing industry, and the EU subsequently introduced a new basis for issuing a license allowing for the execution of aircraft financial leases concluded before February 26, 2022, when strictly necessary to ensure lease repayments to an EU party. (For comparison, the UK had previously adopted a similar licensing ground.)
Further, on December 16, 2022, the EU introduced a new basis for issuing a license which allowed EU operators to (among other things) apply to a member state’s sanctions authority to authorize the sale of aircraft until September 30, 2023, when the sale is necessary for the seller’s divestment from Russia. While license applications may be submitted on this basis, the relevant EU member state authority has discretion to decide whether to grant a license. Certain mandatory criteria are required for a license application to be successful, including that the relevant aircraft was physically located in Russia prior to February 25, 2022. There is no equivalent basis for issuing a license in the UK. The EU and the UK each also banned the export of jet fuel, whether or not originating in the EU or UK, where it was exported to, or was exported for use in, Russia
Because exports of all U.S. technical data to Russia is prohibited, as a practical matter the provision of support services for Western aircraft owned or operated by a Russian airline is banned. BIS has also issued a number of temporary denial orders (TDOs) against several Russian airlines for operating aircraft in violation of the Export Administration Regulations (EAR). These TDOs prohibit the named airlines from participating in transactions involving items subject to the EAR and further prohibit any person from supplying any items subject to the EAR to listed airlines. Restrictions apply to any aircraft or other item subject to the EAR in which a person has knowledge that a violation of the EAR has occurred, is about to occur, or is intended to occur with respect to that item. BIS has published a list, which is routinely updated, of commercial and private aircraft operated in potential violation of the EAR. Any subsequent actions taken with regard to any of the listed aircraft, including, but not limited to, refueling, maintenance, repair, or the provision of spare parts or services, may violate the EAR. It is important to note this list is not considered exhaustive. In a similar vein, the EU banned the provision of various aircraft-related services to any person in Russia or for use in Russia, namely overhaul, repair, inspection, replacement, modification or defect rectifications (with the exception of pre-flight inspection) in relation to aircraft and aircraft parts/technology. Subsequent guidance clarified that “in-and-out” operations (where an airline operates direct flights between a location outside of Russia and a location inside Russia) would not fall within the term “for use in Russia” and services could therefore be provided to aircraft undertaking such flights
Although the UK did not introduce a ban specifically targeting the servicing of aircraft generally, the provision of technical assistance to Russian entities related to prohibited aircraft and aircraft parts, or to any entity in relation to aircraft that are intended for use in Russia, is prohibited. “Technical assistance” for purposes of the UK regulations includes support relating to the repair, use and maintenance of aircraft. There is also a targeted prohibition on providing technical assistance relating to aircraft to or for the benefit of designated persons. In practice, any company with a connection to the UK that intends on servicing aircraft with links to Russia will therefore be required to carefully consider UK sanctions.
Effective March 2, 2022, the United States suspended operations of all aircraft owned, certified, operated, registered, chartered, leased, or controlled by, or for the benefit of, a person who is a citizen of Russia. The suspension applied to passenger, cargo and charter flights, and effectively closed U.S. airspace to all Russian aircraft. On March 10, 2022, the Federal Aviation Administration (FAA) clarified that this closure does not apply to Russian citizens, but rather applies to a Russian person or entity that is identified on the Consolidated Screening List (CSL), which identifies persons designated on U.S. government sanctioned or prohibited party lists. Similarly, the EU and the UK each prohibited aircraft registered in Russia or owned, chartered, operated or otherwise controlled by Russian airlines or other Russian parties from overflying, landing in, or taking off from their territories from February 2022.
In addition to the above, in February and March 2022 respectively, the EU and UK adopted restrictions on the provision of insurance and reinsurance relating to aircraft or other aviation and space items to Russia or Russian parties. In June 2022, the UK government issued revised guidance to clarify that the prohibition would not apply (inter alia) when the items remain in Russia as the result of the termination of a lease and against the lessor’s will, or are flown out of Russia in the process of being returned to their owner.
Throughout February and March 2022, Russian authorities took a number of regulatory steps that resulted in the “grounding” of over 400 aircraft that were on lease from the international lessors. Initial actions included suspension of international flights to “unfriendly jurisdictions” (i.e., the ones that introduced the sanctions targeting Russia), with a subsequent export ban on return of the leased aircraft. Permission was also granted to have a double registration in both a foreign and Russian aircraft registry. Although Russian airlines were allowed to make lease payments in rubles to the lessors’ accounts in Russian banks, those proceeds could not be converted or repatriated, and from the international lessors’ perspective the lease agreement themselves were terminated.
The set of countermeasures meant that repossession of the grounded aircraft became virtually impossible. This has triggered a wave of litigation against the Russian airlines, as well as reinsurers. Significant cases are pending in the English High Court, the Irish High Court and California state court.
Other Posts in the Russia Sanctions: A Year-in-Review Series
Russia Sanctions Year in Review: Impact on Financial Services Sector