Carolyn Cohn and Engen Tham by Tim Hepher

PARIS/SHANGHAI/LONDON (Reuters) – Global leasing companies staring at an imminent sanctions deadline to repossess more than 400 jets worth almost $10 billion from Russian airlines have received mostly radio silence as experts warn of legal wrangling that could last a decade.

After Russia invaded Ukraine, most Western airlines have banned leasing firms from doing business with them. Leasing companies are now allowed to break ties until March 28, which is when lenders try desperately to take over aircraft.

Leasing companies terminate leases and ask for planes back along with paperwork to secure new planes.

However, Western observers have not yet confirmed that this is the case.

Russian airlines refuse to give back aircraft, although it is not official. Bertrand Grabowski (independent aviation advisor) said the only remaining ones were those that had been seized outside Russia.

According to trade journal Ch-aviation, those include two planes that were seized in Istanbul as well as Mexico City.

Other people have managed to get through the net.

Two people who were familiar with the situation said that an Aeroflot Boeing (NYSE 🙂 777 was able to be seized by a non-Russian Bank in Southeast Asia and Gulf during the week.

The Air Current reports that an Airbus A321neo Leasing to the same Flag carrier was the subject of a failure repossession in Egypt.

Aeroflot has not responded to my request for comment.

MASS DEFAULT RISK

Russian airlines have leased almost 780 aircraft, 515 of which are from abroad. Some jets that are leased from Russia can be claimed by foreign banks.

Ascend by Cirium consultants say that 425 of them are the most vulnerable in aviation’s greatest mass default.

Even though the industry is maturing with portfolios valued at up to $300 Billion, it still has a lot of work ahead. However, this does not compare to the impact on the world that the pandemic caused by the death of over 15,000 aircraft.

However, the sector which owns over half of the global airliner fleet has been shocked by the sudden loss of 5-6% market.

A flood of potential claims could lead to a long-running dispute over liability.

This will be in court for ever. “It is generally a very dark picture,” commented Jerrold Lundquist managing director of the Lundquist Group.

Grabowski said, “Between airlines, lessors, and insurers you most likely look at a decade worth of lawsuits.”

Moody’s Ratings Agency (NYSE:) last week warned that a prolonged escalation in sanctions could put pressure on the leasing sector, which rose from its shaky foundations in the 1970s and has since become a major player.

‘UNCHARTED TERRITORY’

Some financiers experienced panic when Russia began what it called a “special operation in Ukraine” last month.

“Someone offered to sell me seven freighters – and two other international lessors asked if I wanted to buy their entire Russian portfolio,” said a person at a China-based lessor, adding the offer had been refused.

The lack of co-operation, security threats on the ground, and bans on airspace and permissions to fly to storage areas are some of the obstacles that jets have been seized. Lenders plan to make a huge payout through war-risk insurance.

However, the market for aviation insurance will not be able pay payouts that could rival the $1.8billion lost to 9/11.

Insurers say that a declaration of war does not have to be made in order to make a claim under a policy covering war-risk. However, nationalisation, seizure, and restraint according government orders are also covered.

However, lawyers warn it might be difficult for Moscow to effectively seize hundreds of planes.

This is a new territory. Lundquist indicated that it is possible for insurers to cancel policies.

The Cape Town Convention is an industry circuit-breaker that helps make international contracts easier to enforce, but war could also undermine it.

Russia was one of the 83 members. It has an international register that facilitates repossessions. But, co-operation is widely considered unlikely. Russian President Vladimir Putin said to flight attendants that Western sanctions “akin a declaration war”.

The majority of lessors use Bermuda’s register over Russia’s legal uncertainties.

Aeroflot’s Chinese lessor said that to transfer the agreement to another entity, it would take layers of approvals which are unlikely to materialize.

    “We’re completely stuck,” said the person who has spoken to an Aeroflot representative almost every day since the invasion.

Even if the conflict ends, Russia’s near isolation could cause permanent damage to valuations. This is because it may disrupt maintenance records or encourage airlines and other companies to swap parts.

These indirect consequences could go further, forcing Airbus to sell dozens more jets to Boeing and stopping others from converting older Russian planes into freighters during a boom in cargo.

Asset-backed securities, which are used by lessors for financing ease and contain high Russian risk, also feature in the spotlight.

This all happens while high oil prices are threatening to rip into airline balances and cause credit damage for all airlines.

IBA, a UK-based consultancy in aviation said that the crisis has already delayed industry recovery from the pandemic by two months.

Critics argue that the crisis requires a review of the way risk management is done in the industry. Its ability to transport assets in order to avoid volatility regionally was a key selling point for investors over the years. The industry is struggling to find equilibrium after a pandemic in the world and an isolated Russian fleet.

Grabowski stated that there was an assumption that Russia was capable of taking on significant capacities that other countries could not because of the COVID-19 crises.

Russia was the last option for those with excess planes. The market thought Aeroflot was a creditworthy company, but they forgot about the political risks.