Russian law creates new hurdle for foreign plane lessors

(Reuters) -Russia on Monday passed a law allowing the country’s airlines to place airplanes leased from foreign companies on the country’s aircraft register – a manoeuvre likely to stoke Western fears of a mass default involving hundreds of jetliners.

The bill, signed by Russian President Vladimir Putin, has rattled global leasing firms days before a March 28 deadline to repossess aircraft worth $10 billion as a result of Western sanctions imposed following Russia’s invasion of Ukraine.

Russian airlines have almost 780 leased jets, with 515 leased from abroad.

The new law, part of Russia’s measures to combat the sanctions, says it aims “to ensure the uninterrupted functioning of activities in the field of civil aviation”.

It comes after Bermuda and Ireland, where virtually all foreign-leased jets operating in Russia are registered, said they were suspending airworthiness certificates on the jets because they could no longer be sure they were safe.

Re-registering jets in Russia would aim to keep them flying domestically by granting access to new safety approvals.

But adding Russia as a second host country could put Moscow at odds with international rules barring the registration of civil planes in more than one country at a time.

Unless Western lessors agree to Russian requests to release their jets from foreign registries – widely seen as unlikely while they struggle as it is to regain control of assets – the new policy also paves the way for a major contractual debate.

“It is illegal to register an aircraft without proof of deregistration from the previous registry as well as the agreement of the owner. This would be a default under leasing contracts,” said aviation adviser Bertrand Grabowski.

AIRLINE DILEMMA

Technically, the new law does not instruct airlines to re-register their planes without the permission of owners led by Dublin-based AerCap, the world’s largest air lessor.

But experts said it puts the onus on the airline to apply for new registration to keep flying inside Russia – at the risk of poisoning relations with powerful lessors once the crisis is over – or else do nothing and see their fleets grounded.

Not all of Russia’s 35 airlines, about 15 of which represent 95% of the country’s traffic, are relishing what experts have already warned could spiral into aviation’s largest default.

“We hope to avoid registering our planes in Russia; we want to return them to leasing companies,” a source at one of the airlines said.

“The airline would become an accomplice. The law provides a way to register in Russia, but does not oblige the airline to do so….It is the first step to the kidnapping of the airplanes.”

Moscow’s government insists special measures are needed in the face of sanctions on the economy that President Vladimir Putin has described as “akin to a declaration of war”.

Lawyers say a three-way legal battle between airlines, lessors and insurers could last for a decade.

AerCap and other major lessors declined comment on the law. Major Russian airlines Aeroflot and S7 also declined comment.

The Russian Federal Aviation Agency said 776 planes were registered abroad as of Feb. 24, the day Russia invaded Ukraine. Russia calls its actions in Ukraine a “special operation” to demilitarise and “denazify” its neighbour.

Dozens of older planes that found homes in Russia during the pandemic may never be returned and are said to be worth less than their owners may be able to claim in insurance.

But the world’s 11th largest aviation market also includes some of the newest jets including a state-of-the-art Airbus A350 delivered to Aeroflot on the day of the invasion.

The United States and Europe on one side and Russia on the other have blocked their airspace to each others’ airlines.

Russia’s state aviation authority recommended last week that airlines with foreign-leased aircraft suspend flights abroad, making it harder for lessors to make repossessions. Some 425 jets are most at risk, the consultancy Ascend by Cirium says.

(Reporting by Reuters; Editing by Tim Hepher, Edmund Blair and Emelia Sithole-Matarise)