Executive Summary

The aviation industry is facing heightened risks in the wake of escalating international sanctions and export controls. A stark example of this is Russia’s recent seizure of aircraft owned by Western companies. To mitigate the risk of losing aircraft and other assets, civil aviation lessors and insurers must identify jurisdictions where asset recovery is becoming more complicated. By understanding the regulatory environments of these jurisdictions, firms can mitigate exposure to legal and financial pitfalls. Implementing proactive risk management strategies is crucial for safeguarding assets and ensuring adherence to international regulations.

Aircraft Leasing Terminations in Russia

The EU and United States have both imposed sanctions affecting Russia’s aviation industry.

The United States placed significant export restrictions on U.S.-origin aircraft, parts, and technology to Russia under the Export Administration Regulations (EAR), requiring entities with U.S. ties to revoke existing export licenses for aviation items to Russia. The regulation resulted in a grounding of all aircraft operated in Russia or owned by Russian entities that contain U.S.-origin components — a category that encompasses much of the modern commercial aviation fleet.

Further, the EU has imposed sanctions prohibiting the sale, supply, transfer, or export of aircraft and parts to Russia and bans on insurance and reinsurance services for these aircraft. This action, part of Regulation 833/2014 and its amendments, also mandated Western lessors to terminate leasing contracts with Russian airlines.

Due to Western restrictions, Russian-operated aircraft have lost access to essential maintenance and repairs from Western providers, complicating repossession and compliance efforts for Western lessors, who have found themselves unable to service or reclaim leased aircraft located in Russia​. Exacerbating the challenges for Western aviation lessors, in March 2022 as part of broader measures aimed at countering Western sanctions and keeping aircraft in Russia, the Kremlin implemented legislation permitting Russian entities to seize foreign-owned planes by re-registering them as Russian-owned. This illegal re-registration of foreign-owned aircraft enabled Russian entities to seize planes.

By re-registering the aircraft, Russia made it possible for the aircraft to continue operating domestically, but violated international legal norms such as the Cape Town Convention, which outlines rights and protections for lessors in repossession scenarios.  Russia’s re-registration complicated future repossession efforts by Western lessors, exposing Western lessors to significant financial losses.

Current Developments and Consequences for Lessors

Russia’s actions have placed lessors in precarious financial and legal positions. The forced re-registration of foreign-leased aircraft blocked lessors from reclaiming their assets and left more than 400 aircraft stranded in the country. As their insurance claims show, lessors have lost over $8 billion because their aircraft were either used by Russian airlines without compensation or were left unrecoverable.

Beyond the loss of physical assets, lessors now face significant challenges in enforcing their insurance claims. Insurers, particularly those based in London and New York, have disputed coverage for the stranded aircraft, arguing that the planes were not “lost” but rather “seized,” a legal distinction that complicates claims under many all-risk policies, which are often vague as pertains to such a scenario. The vagueness in these insurance policies has led to legal battles, with major lessors such as AerCap, Air Lease, and SMBC Aviation Capital seeking billions in compensation from insurers. In one notable case, AerCap, the world’s largest lessor, is suing for $3.5 billion in the London High Court for the loss of 116 aircraft and 23 engines.

Some lessors have reached settlements with Russian entities, resulting in $2.7 billion in compensation for about 100 of the 400 stranded jets. However, these settlements often required transferring ownership of the planes to Russian state insurers, effectively conceding the assets to Russia. While lessors have managed to recover some losses from these deals, not all losses have been recouped. Many aviation lessors are currently engaged in legal disputes with Western insurance companies to offset their losses, facing the possibility of never fully recouping them due to ambiguity in insurance policies regarding seizure.

Mitigating the Risks

Lessors can lower their risks by consulting with regional risk experts who can provide operational teams with strategic due diligence. Lessors need to be particularly careful when working in jurisdictions with high sanction targeting or unstable governance, such as Russia, Venezuela, Iran, North Korea, Syria, Belarus, as well as emerging markets such as Sudan, the Democratic Republic of Congo, Myanmar, Nicaragua, and Cuba. These jurisdictions often pose significant challenges to compliance and asset recovery due to weak legal frameworks or disregard for international norms like the Cape Town Convention.

Risk experts with regional expertise can support legal teams in crafting carefully structured contracts to prevent losses. Legal teams need to ensure that these contracts are carefully formulated; repossession clauses must be clear and enforceable to allow lessors to recover assets in case of default or sanctions. Force majeure clauses should also account for sanctions, enabling contract termination in the case of new legal restrictions. For an additional layer of protection, lessees should hold political risk insurance. Contracts should use governing law from stable jurisdictions to ensure they are enforceable in disputes. By blending strategic due diligence with well-drafted contracts, lessors can reduce their exposure in high-risk markets.

At FiveBy, we provide in-depth due diligence and sanctions assessments for high-risk jurisdictions including Russia, China, Venezuela, and Iran. Our expertise in regional policies, global sanctions, and regulatory compliance can support firms in creating tailored contracts to reduce exposure to geopolitical risk.