'You're seeing the rule of law basically torched': Russia nationalizes its passenger jets

Russia's war in Ukraine is hitting the aircraft leasing industry hard, upending the internationally agreed-upon norms of aircraft financing.

Russian airlines lease around 500 aircraft from foreign companies. A law signed this week by Russian president Vladimir Putin allows these carriers to continue to operate these aircraft on domestic flights, even after the lessors cancel the leases, according to the state-owned TASS news agency.

It's a repudiation of foreign-owned debt — and the rule of law, said aviation consultant and former airline executive Robert Mann.

"You're seeing the rule of law basically torched," Mann said in an interview with TPG. "It's essentially walking away from the rule of law that a rational nation upholds, and we're just seeing them walk away from that."

Most of those aircraft are currently in Russia, giving the lessors little hope in recovering these multi-million dollar assets.

"I don't know how you do that under these circumstances," Mann said. "That seems to be beyond any movie that you're gonna see on Netflix — that just seems to be an impossibility."

There's also the issue of spare parts and manufacturer-provided services. A combination of sanctions and unilateral actions by Boeing, Airbus and engine manufacturers mean that Russia is now cut off from receiving the parts and service support necessary to maintain its fleet of nationalized aircraft. This means that everything from hydraulic pumps to aeronautical charts provided by a company called Jeppesen, which is owned by Boeing, are now off-limits.

"Airplanes will be grounded as no additional parts are available to fix them," Mann said, adding that some aircraft are likely to be permanently parked and raided for spare parts. On the parts front, it will possibly be a situation similar to that of Iran, which was cut off from Western supply chains following the 1979 Iranian Revolution yet was able to maintain an airline industry and a fleet of western aircraft.

There could be safety implications to this strategy, Mann said.

Daily Newsletter

Reward your inbox with the TPG Daily newsletter

Join over 700,000 readers for breaking news, in-depth guides and exclusive deals from TPG’s experts

Email address

Sign up

Submitting...

By signing up, you will receive newsletters and promotional content and agree to our Terms of Use and acknowledge the data practices in our Privacy Policy. You may unsubscribe at any time.

"I don't like to think that anybody would knowingly operate an aircraft that wasn't airworthy," he said. "But I don't know that there's enough information to even know if that's the case."

More: Should you change your European travel plans in light of Russia's invasion of Ukraine?

There are also legal changes happening. Nearly 75% of Russian-operated aircraft were registered in Bermuda, according to the aviation consulting firm IBA, and that nation has now suspended those registrations over safety concerns. Russian operators are now dual-registering those aircraft in Russia, something that the International Civil Aviation Organization, the United Nations' aviation body, says is inconsistent with its core principles due to ambiguity about safety oversight.

"Again, that's, that's kind of part and parcel of the walking away from the rule of law," Mann said. "It's walking away from the rule of oversight in that particular case."

Traditionally, aircraft lessors and financiers would look at financial risk as the primary component of their due diligence conducted as part of a leasing deal. Russia's actions might change that going forward — especially for deals being done with airlines that operate in autocratic countries, Mann said.

"Now you have a much bigger issue and that is the due diligence on sovereign risk and literally the rule of law," he said. "If you give operational custody of an asset to someone who would then just ... steal it, that's the sort of risk that no one has really ever had to consider. Why would you even consider doing business in a situation like that?"

Featured photo by Leonid Faerberg/SOPA Images/LightRocket via Getty Images.