European Union sanctions in response to Russia's invasion of Ukraine - Application to the aviation industry
European Union sanctions in response to Russia’s invasion of Ukraine - Application to the aviation industry
Regulation (EU) 2022/328 of 25 February 2022, introduced a prohibition on the sale, supply, transfer or export of aircraft, spacecraft or parts thereof to any natural or legal person, entity or body in Russia or for use in Russia. This prohibition includes leasing aircraft to Russian persons or entities or for use in Russia.
There is a corresponding prohibition on providing technical assistance, brokering services and other services as well as financing or financial assistance related to aircraft, spacecraft and parts thereof to any person, entity or body in Russia or for use in Russia.
A 'grace period' of 30 days applies in the case of contracts concluded before 26 February 2022; the prohibitions will not apply to the performance of such contracts until 28 March 2022.
The provision of insurance and reinsurance in relation to aircraft, spacecraft or parts thereof and of maintenance services concerning aircraft or components to any natural or legal person, entity or body in Russia or for use in Russia is also prohibited. The 30 day 'grace period' above does not apply in relation to these activities; the prohibition has immediate effect.
A prohibition on the sale, supply, transfer or export of dual-use goods and technology, to any person or entity in Russia or for use in Russia, irrespective of whether they are intended for military use of military end-users has also been introduced.
On 25 February 2022, the EU adopted a package of sanctions in response to Russia's attack on Ukraine. This second package builds on, and significantly expands, the first package of sanctions adopted on 23 February in response to Russia's recognition of the Donetsk and Luhansk oblasts of Ukraine as independent entities. The EU has not exhausted its sanctions armoury yet and has threatened to impose further measures as the situation on the ground in Ukraine develops.
The sanctions package adopted on 25 February 2022 has significant implications for the aviation industry. We set out below a summary of the recently adopted sanctions of particular relevance to the aviation industry and our view on the impact of these sanctions on the aircraft leasing industry and steps businesses can take to protect themselves.
Council Regulation (EU) 2022/328 of 25 February 2022 amends Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine. This is directly effective in Ireland and as such, legally binding on all natural and legal persons in Ireland. It came into effect on 26 February 2022.
Regulation 2022/328 introduces a number of prohibitions relevant to the aviation industry.
The sale, supply, transfer or export, directly or indirectly, of aircraft, spacecraft and parts thereof to any natural or legal person, entity or body in Russia or for use in Russia is prohibited (Article 3c(1)). Included in this prohibition is supplying aircraft to Russian persons or entities or for use in Russia by means of leasing. This applies irrespective of whether the goods or technology originate in the EU or not.
There is also a corresponding prohibition on the provision of technical assistance, brokering services or other services (Article 3c(4)(a)) and the provision of financing or financial assistance for any sale, supply, transfer or export of those goods and technology (Article 3c(4)(b)) directly or indirectly to any person, entity or body in Russia or for use in Russia. These prohibitions also apply to the provision, manufacture, maintenance and use of those goods and technology.
There is one exception to the prohibitions above. The prohibitions do not apply to contracts concluded before 26 February 2022 or ancillary contracts necessary for the performance of such contracts until 28 March 2022 (Article 3c(5)).
It is further prohibited to provide any of the following in relation to aircraft, spacecraft and parts thereof, directly or indirectly, to any person, entity or body in Russia or for use in Russia:
Insurance and reinsurance(Article 3c(2))
Any one or any combination of the following maintenance activities or components: overhaul, repair, inspection, replacement, modification or defect rectification of an aircraft or component, with the exception of pre-flight inspection (Article 3c(3))
The 30-day grace period noted above does not apply to the prohibitions related to insurance and reinsurance as well as maintenance activities or components described above. Accordingly these prohibitions have immediate effect.
Regulation (EU) 2022/328 has extended the existing restrictions on dual-use goods and technology. It is now prohibited to sell supply, transfer or export of any dual-use goods and technology to any natural or legal person, entity or body in Russia or for use in Russia. This prohibition applies whether or not such goods and technology are intended for military use or for military end-users. (Article 2(1))
Again, there is also a corresponding prohibition on the provision of technical assistance, brokering services and other services as well as of financing or financial assistance related to the goods and technology.
A number of authorisations are provided but the competent authorities must not grant an authorisation if they have reasonable grounds to believe that the end user might be a military end-user of one of the listed bodies in Annex IV. This list includes a number of aircraft companies including Russian Aircraft Corporation MiG, United Aircraft Corporation and Sukhoi Civil Aircraft.
As a consequence of the provisions outlined above, we understand that the Irish authorities are contacting lessors with aircraft leased from Ireland and informing them that any aircraft leases with Russian lessees must be terminated within the specified 30 day period (ie up to 28 March).
Lessors will need to urgently review their leases to determine the termination rights available to them as a result of the new sanctions (whether through illegality or event of default clauses). In this regard, sanctions imposed by the USA and, in particular, the UK, withdrawing insurance cover from aircraft leased to Russian lessees may be relevant.
Further issues (both practical and legal) will arise in relation to the ability of any lessor to successfully take possession of an aircraft in Russia where a lease has been terminated, and to transport it to another country. Although Russia is party to the Cape Town Convention, it is unclear how the protections of the Protocol to the Cape Town Convention will be applied in practice in Russia. Licensing of pilots, insurance and potential consents from destination countries as to the transfer of the aircraft will all be relevant.
Lessors and financiers will also need to review carefully any finance arrangements in relation to the relevant assets to determine the consequences that may arise under the financing in view of the new sanctions announced by the EU, UK and USA. We are continuing to monitor the practical application of the rules by the Irish and EU authorities.
These new sanctions are changing in real time in response to the crisis on the ground in Ukraine. The EU has threatened to introduce further sanctions. As of 28 February 2022, the EU has published a new Regulation (EU) 2022/334 to, inter alia, close European airspace to Russian aircraft while the EU, USA and UK have pledged to exclude certain Russian banks from the Swift banking system. We are continuing to monitor the situation and we will alert you to any further significant updates.