Jamie Freed, Tim Hepher

(Reuters) – Russia has published a draft law that would prevent airlines from returning leased aircraft. This raises the stakes for a battle with Western finance, which could see them lose more than $10 billion in jets.

Leasing firms have until March 28th to get rid of Russian airline deals. This is in response to sanctions imposed by Russia after the invasion of Ukraine.

According to the draft law by the transport ministry Russian airlines will be able to lease in rubles throughout 2022.

The special government commission that decides whether or not the aircraft may be returned to the foreign lessor is responsible for terminating the agreement.

Eddy Pieniazek (head of analytics and advisory for UK-based Ishka aviation consultancy) said, “It’s a bad deal tied to an even more terrible offer.”

After Russia’s February 24th invasion of Ukraine, which prompted Western sanctions, the ruble has fallen around 30%.

Leasing agreements are usually denominated using U.S. Dollars, which is the currency that the mostly Irish-based leasing market borrows money to pay for planes.

A treaty known as the Cape Town Convention, which requires that airlines return their aircraft to the airports without any interference, is in effect if the contracts are terminated. However, Western sources state this is unlikely, while Russia maintains that the sanctions were improper.

Cape Town must be brought into action to ensure an orderly recovery process. Pieniazek stated that they were suggesting breaking the terms of all aircraft’s contracts.

Russia has already been deprived of the majority of its aircraft parts and aircraft, and many airlines have had to cancel international flights due to fears that their planes will be taken by banks or foreign lenders.

The authorities have had to freeze large amounts of Russia’s foreign reserve and look into ways they can limit outflows of foreign currency.

MASS DEFAULT

The global leasing sector, which controls more than half the global airliner fleets, is at risk of what experts call the largest mass default. However, it will be dwarfed in the COVID-19 global groundings.

Experts warn that the resulting flood could lead to a decade long legal dispute between insurers and lessors, with uncertainty about whether or not war-risk policies will be paid out.

In the absence of clear guidelines over the next steps, Lessors fear that the crisis will cause many insurance contracts to be cancelled. They are expected to hold off on writing down claims until the situation is resolved.

BOC Aviation, with 4.8% of its assets leased to Russian Airlines, was one of the first to raise insurance concerns on Thursday.

The results showed that the international aviation insurance market is gradually cancelling some elements of insurance policies relating to Russian aircraft or their leased owners.

“This situation is complex and fast-developing. We will be closely watching.”

Russian airlines have leased almost 780 aircraft, with 515 being leased from foreign lessors.

Consultants Ascend by Cirium estimate that 425 of them are the most at-risk.

According to data from the industry, AerCap in Dublin, which is the world’s biggest lessor has the greatest exposure per unit with 152 planes rented out to Russian airlines.

The company declined to comment on the draft law Thursday, but stated that around 5% (by net value) of its fleet was on lease in Russia on February 28th and would stop all activity there.