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Russia explores buying stranded jets from Western leasing firms

Russian airlines have held exploratory talks with at least one major Western leasing firm about using state funds to buy some of the more than 400 aircraft stranded in Russia after its invasion of Ukraine, according to documents and sources.

The proposal, which would need EU approval and test the scope for compromise in an economic war between Moscow and the West, could lower a multibillion-dollar bill facing lessors and insurers and allow Russian airlines to secure formal ownership of planes at a potentially steep discount.

A Russian aviation source said the proposal was still being discussed, but that some Russian officials were pessimistic about it getting European Union approval.

An EU official familiar with discussions on the issue declined to comment.

Before what Moscow calls its “special military operation” in Ukraine, Russia was a major market for aircraft lessors, who bought jets from Boeing (BA.N) and Airbus (AIR.PA) and leased them to Russian airlines who wanted to avoid the up-front cost and inflexibility of buying planes themselves.

But after Western sanctions forced lessors to cancel these contracts, Moscow refused to allow the planes to leave, stranding almost $10 billion worth of aircraft in Russia and triggering claims by lessors against their own insurers.

Russian airlines continue to operate many of the jets, but some have struggled to secure replacement parts.

Details of talks between Russian airlines and one lessor emerged in an Irish court case where major lessors are suing insurers, including Lloyd’s of London (SOLYD.UL), to ensure payment of their claims.

AerCap (AER.N), SMBC Aviation Capital and Avolon, the world’s largest lessors, declined to comment on whether they were involved in talks on payment for jets from Russian airlines or their insurers.

EU sanctions, which cover Ireland where the majority of leased aircraft are registered, banned the supply of aviation technology to Russian entities and set a deadline of March 28 to terminate contracts.

There has been no suggestion that any of the lessors, who operate in a highly regulated sector, have infringed sanctions in any way, with industry figures saying they were exploring all options in an unprecedented situation.

RUSSIAN STATE FUNDS

Russian state backing for the talks was demonstrated in an Aug. 30 letter from its Transport Ministry to 23 airlines.

“On 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,” the letter said.

It also asked for “information on the … existence of agreement with lessors and insurance companies on a plan for the repurchase of the aircraft”.

The ministry did not respond to a request for comment.

World No. 2 lessor SMBC said in a Sept. 15 letter released to the Irish High Court that it had spoken to Aeroflot (AFLT.MM) and Aeroflot’s insurer AlfaStrakhovanie.

“AlfaStrakhovanie advised that it had been approached by Aeroflot to explore the possibility of making ex-gratia payments …. to SMBC AC in settlement of the insurance claims,” said the letter, a copy of which was made available to Reuters and other media by the court.

The payment would be “in return for the transfer of ownership of the aircraft to the Russian insurer or its nominee,” the letter, which was first reported by Irish publication The Currency, added.

SMBC, which took an impairment of $1.6 billion for 34 jets, said in the letter that on Sept. 2 AlfaStrakhovanie offered it $644.2 million for 17 aircraft leased to Aeroflot, minus $82 million already paid in deposits and reserves.

That was “considerably less than the aggregate Agreed Values” for the aircraft, SMBC said in the letter.

SMBC also said in the letter that it had been approached by Elbrus Insurance Brokers LLC on behalf of Russian airline NordStar and, separately, by airline S7 to discuss “potential claim solutions.”

Aeroflot, AlfaStrakhovanie, Elbrus, NordStar and S7 did not respond to requests for comment.

EU LOBBYING

SMBC in its letter said it was involved in lobbying the EU to facilitate a deal, specifically a derogation from Article 3C of Regulation 833/2014.

Such a derogation “would enable EU operating lessors to seek authorisation to transfer ownership of aircraft formerly leased to Russian lessees or their Russian insurers,” it said.

Lessors could argue agreement would boost safety by allowing access to spare parts, said Ross Denton, head of international trade at law firm Ashurst.

But one Western finance official said any deal would face major legal and diplomatic hurdles and talks may be premature.

“Right now, it would be such a flagrant contravention of sanctions – why would governments all of a sudden agree to this?” the senior official said on condition of anonymity.

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