Russian sanctions, aircraft seizures –
Is there a way out?
Mar/Apr 2022
A new law passed by Russia in retaliation for the sanctions imposed by the UK, the EU and the US would permit Russian airlines to retain the aircraft leased by foreign lessors, in contravention of the Cape Town Convention (which requires their return) and to re-register them in Russia. The new law would leave lessors between a proverbial rock and hard place: where sanctions require a lessor to terminate a lease, in so doing, the lessor will generally be able to rely on standard clauses in the lease on “illegality”, which entitle a party to terminate if performance has become unlawful, and/or similar “change of law” and/or “force majeure” clauses, yet there is now a distinct possibility that they would not be able to retrieve their assets or re-lease them. The new law is presumed to be aimed at evading the suspension by the aviation authorities where the aircraft are currently registered of their certificates of airworthiness.
Is insurance the answer?
It may be possible for lessors to seek recovery of losses under insurance policies, subject to any exclusions. Check whether the insurance mandated by the aircraft lease agreement is still valid or even exists, as some Russian lessees have reportedly terminated the “Western” policies, replacing them with policies from Russian insurers. Here, the likelihood of recovery through the Russian courts applying Russian legislation will be low. Definitions of “war risk” or similar may vary from policy to policy and some may include seizure or nationalisation. However, insurers facing a massive number of claims will be looking for grounds to deny coverage, potentially including arguments that the new law falls short of nationalisation because re-registration is optional.
Bilateral Investment Treaties?
Bilateral Investment Treaties (“BITs”) between Russia and the lessor’s home state or multilateral treaties may provide a further option for potential recovery through a BIT claim against Russia.
States conclude BITs to encourage investment and offer some protection from political risk. Such treaties prohibit the “host” state from expropriating, nationalising or applying similar measures to foreign investments. Many BITs also require that the “host” state treat foreign investors fairly and equitably. If the recent actions of the Russian state are deemed to amount to expropriation the lessors may be able to rely on BITs to obtain compensation for the loss of their investment.
Russia has over 60 BITs in force with other states, which may include the states where the lessor is incorporated (for example, Japan, Singapore, the UAE). Once a dispute has arisen, however, transfer of assets or claims by a potential claimant to another entity incorporated in a country which has a BIT with Russia, or which has a more advantageous BIT with Russia (known as “forum shopping”) is unlikely to succeed.
The first step is to check whether the lessor falls within the definition of “investor” under the relevant BIT. “Investor” is usually defined to include citizens of or entities incorporated in a given state. Some BITs cover only direct investments while others extend to indirect investments that may allow a lessor not based in a state which has a BIT with Russia to claim if the parent company or individual shareholders are incorporated in, or are citizens of, a country with a BIT covering indirect investments.
The lessor should also check whether it can show that it has made an “investment” under the BIT. The definition of “investment” is usually wide to include all kinds of assets — from property to rights over property; even if the aircraft is registered in a country that is not the lessor’s place of registration, it may still be possible for the lessor to qualify but, depending on the wording of the BIT, a lease alone may not be sufficient to show an investment in the host country.
Also worth considering is whether the BIT contains a Most Favoured Nation clause, which may permit the investor to import more favourable terms contained in other BITs to which Russia is party.
While BIT claims are usually complex, requiring careful analysis from the outset, they could provide a remedy to lessors. BIT claims are usually heard in arbitration by an independent tribunal seated outside Russia that will apply rules of international law. They may also provide an incentive to settle.
Enforcement
Finally, lessors should consider enforcement from the outset before embarking on a BIT claim. Even if the lessor succeeds and obtains a monetary award from the tribunal, such an award would be difficult to enforce in Russia. Thought should be given not only to freezing Russian assets held outside Russia to satisfy the award (many such assets, if “non-commercial”, would normally be protected by sovereign immunity, but it is possible that legislation might be introduced to change this if there is the political will to do so), but also to how this would interact with asset freezing due to sanctions.
The current sanctions (in that they involve freezing assets) could be a benefit to claimants — on the one hand, BIT claimants do not usually have the advantage of “pre frozen” assets (although many of the assets frozen to date are not directly government-owned and, as such, would likely not be available to a BIT award creditor unless new legislation is passed). On the other hand, there have been calls for the frozen assets to be sold off and the proceeds used to assist Ukrainians affected by the war, which would make them unavailable to BIT award creditors.
| By Deborah Ruff, Head of International Arbitration, Julia Kalinina Belcher, Counsel, Charles Golsong, Counsel, and Charlotte Stewart-Jones, Associate, at Pillsbury Winthrop Shaw Pittman LLP |
