Nine months since Russia's invasion of Ukraine forced over 400 foreign leased aircraft stranded in Russia, a potential compromise is being discussed. Aeroflot, S7, and several carriers have signaled interest in buying their leased fleet at a massive haircut, paid for by the Russian National Wealth Fund. While the deal would see lessors regain a part of their lost capital, it will be an uphill battle amid ongoing sanctions.

A breakthrough?

When war broke out in Ukraine and the EU ordered all aircraft leases to be canceled, Russia moved quickly to seize some 400 foreign aircraft on its soil. These jets were re-registered (illegally) and continued to be operated by carriers domestically, with occasional international trips where the risk of seizure is lower. However, the illegal ownership and sanctions mean getting spare parts is nearly impossible, while lessors are forced to write off billions in assets.

According to Reuters, Russia is now proposing a transaction that will see foreign leased aircraft formally sold to Russian carriers at a big discount. The state will be backing such a purchase, according to a Transport Ministry letter to 23 airlines in the country, which stated,"[O]n the purchase of aircraft of foreign lessors, please submit information ... on each aircraft that it is proposed be bought out using the resources of the National Wealth Fund."

S7 A320
Photo: Nordroden | Shutterstock

Backed by national resources, airlines have been reaching out to their respective lessors to cut deals for their stranded jets. Aeroflot and its insurers offered lessor SMBC $644.2 million for its 17 aircraft present in the fleet, with $82 million already covered in reserves. Notably, SMBC wrote off $1.6 billion for 34 planes in September, meaning this deal would be giving lessor much lesser than market rates for their jets.

S7 Airlines, NordStar, and several Russian insurance firms have reached out to lessors in recent months, although no agreements have been made yet.

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Regulatory hurdle

With the war in Ukraine fast heading to its one-year mark, the EU has little incentive to ease sanctions on Russia right now. SMBC, for instance, is asking the EU to approve exceptions to Regulation 833/2014, which would allow it to transfer planes to Russian lessees. One senior official described a potential exception as, "[R]ight now, it would be such a flagrant contravention of sanctions - why would governments all of a sudden agree to this?"

Indeed, turning over hundreds of Western-made aircraft to Russian carriers hardly gels with plans to exert maximum sanction pressure on the country. However, lessors argue that safety is being compromised on a daily basis due to the fact that spare parts are impossible to procure while the planes are illegally owned.

aeroflot and rossiya planes at airport
Photo: Telsek | Shutterstock

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Lessors have a clear interest here and are hoping to recover at least a part of their capital stuck in Russia. While rates will be discounted, insurance companies have not been jumping at the chance to pay out multi-billion-dollar claims. Cutting a deal would allow lessors to stem their losses partially from Russian carriers and end the years-long insurance process.

For now, there are several hurdles before any deal is made with Russian airlines. But as planes falter without spare parts, both sides are desperate to reach a deal.

What do you think about Russia's offer to buy jets? Let us know in the comments.

Source: Reuters