Russia holding 400 passenger jets hostage in global sanctions fight

The incident kicked off a diplomatic row on the tropical island south of India, which is heavily dependent on Russia for tourist income and, of late, for fuel. First, Aeroflot halted all flights to the island, blocking the flow of leisure travelers. Then, in private talks, according to a European official familiar with what took place, Moscow threatened to cut off energy deliveries as well — something that would have worsened an economic crisis that was already causing food and fuel shortages and widespread unrest.

Within days, the court, acting after a request from the government, issued a new ruling clearing the jet to fly, and it left for Russia, where it now flies regularly between Moscow and Kyrgyzstan.

For Sri Lanka, the battle over the Irish-owned airliner was just a blip in a long string of developments that last week led to chaos as protesters stormed the homes of the president and prime minister, forcing them to promise to resign and the president to flee the country. But for Russia, it was a victory in a hard fought campaign against a four-month Western sanctions campaign, demonstrating the lengths Moscow is willing to go to defend its economy, particularly in vulnerable nations where it has leverage.

There are signs that the sanctions are starting to bite. Russian government statistics show that auto production plummeted by 96.7 percent in May compared with a year ago, threatening a sector that employs 600,000. Economists say that reflects a broad collapse in manufacturing as foreign-owned factories close and domestic ones struggle to import Western components.

Hundreds of foreign companies have ceased operations in Russia, inflation is running at 16 percent and the country’s gross domestic product will contract by 8.5 percent this year, the International Monetary Fund predicts. Economists say Russia’s long-term prospects remain dire. “The potential for the decline is far from exhausted,” Sergey Aleksashenko, a former top official in Russia’s Finance Ministry and central bank, who now lives in the United States, wrote June 30 in a newsletter.

But some factors continue working in Russia’s favor, including lucrative oil and gas exports that fund the military and social safety net. Russia earned about 93 billion euros — roughly $93 billion, or $1 billion a day — in revenue from fossil fuel exports in the first 100 days of the war, according to the Centre for Research on Energy and Clean Air, a nonprofit in Finland.

And Moscow is fighting hard where it can to blunt the sanctions’ impact. Aviation is one of those sectors.

To date, Russian airlines are refusing to return more than 400 planes and a slew of aircraft parts that they leased from Western companies, forcing the leasing companies to file $10 billion in insurance claims, according to data and research provider Cirium.

“Sanctions may be serving the long-term purpose of isolating Russia,” said Risto Maeots, chief executive of an aviation-servicing company in Estonia that has been unable to recover several engines from Russia. “But in the short term, they weren’t as painful as they were meant to be.”

For all the attention given to the seizure of yachts belonging to Russia’s oligarchs, what happens with the aircraft is of far greater import, he added.

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“What will the West do with the yachts — go fishing? Russians can do much more with the jets,” he said. “So short term, they got a fairly good deal.”

Asked to comment, Russia’s embassy in Washington, D.C., did not address questions about the Sri Lanka case but referred to remarks June 8 from the Foreign Ministry calling the sanctions illegal.

“International civil aviation has turned into a tool of political and economic pressure. This is nothing but a blatant abuse of international air law,” spokeswoman Maria Zakharova said then, adding that the sanctions would “adversely affect flight safety.”

Sri Lanka’s Ministry of Foreign Affairs called the incident a commercial dispute and said the government did everything to not escalate it into a diplomatic one.

Aviation sanctions were designed to target one of Russia’s key vulnerabilities — it relies on Boeing and Airbus jets manufactured overseas and owned by Western leasing companies. Of the 968 planes in Russia’s commercial fleet on the eve of the Ukraine war, 515 belonged to non-Russian leasing companies, according to Rob Morris, global head of consultancy at Cirium.

Even aircraft manufactured inside Russia, such as the Sukhoi Superjet, a regional aircraft, and the Irkut MC-21, intended to compete with the Airbus A320 and Boeing 737, use engines, avionics and software from the United States and Europe. A Russian state-owned company is attempting to develop a fully domestic engine for the MC-21, but it’s going to take time, analysts say.

Sanctions required Western companies to terminate their leases and recall their planes. And an unprecedented set of export controls imposed by a coalition of 37 countries in Europe, North America and Asia also banned companies from selling new planes, parts or software to Russia, from servicing Russian-operated aircraft or providing them online software updates. Even refueling a Boeing jet leased by a Russian entity was off-limits.

But in March, Russian President Vladimir Putin delayed some of the pain by signing a law allowing airlines to keep foreign aircraft for use on domestic flights. So far, Western companies have recovered only about 80 of the 515 planes they leased to Russia, according to Cirium.

“The lessor community as a whole has accepted the fact that most aircraft they have placed within Russia will not be repossessed,” said Mike Stengel, a consultant with Michigan-based AeroDynamic Advisory.

AerCap’s tortured pursuit of the jet that escaped seizure in Sri Lanka shows how poorly the recovery efforts have gone. The Irish company, the world’s largest lessor of commercial aircraft, says it alone has more than 100 planes stuck inside Russia, for which it has submitted $3.5 billion in insurance claims.

According to court documents in Sri Lanka, AerCap wrote Aeroflot demanding the return of the Airbus A330-300 two days after Russia invaded Ukraine in February. It followed up with five more letters by mid-April, but Aeroflot kept using the plane, worth an estimated $17.3 million, to shuttle tourists to and from Sri Lanka — providing the nearly bankrupt nation a rare source of income.

When AerCap won the court order that grounded the plane on June 2, Aeroflot protested, canceling all of its flights to the country and claiming that Sri Lanka had given Russia a “state guarantee” that its aircraft could fly in and out unmolested. Moscow’s Foreign Ministry warned Sri Lanka’s ambassador of “negative impact” on bilateral relations.

Among Moscow’s threats, according to the European official, was to cut off energy deliveries. Those had proved crucial on at least one occasion in late May, when a shipment of Russian oil allowed Sri Lanka’s sole refinery to restart for the first time in over two months, Bloomberg News reported.

In an interview with a local paper published June 5, Sri Lanka’s justice minister said he instructed the attorney general to “sort it out because there are consequences beyond the law. Our country can be affected prejudicially due to such orders.”

The next day, Sri Lankan government lawyers representing the state-owned airport joined Aeroflot in asking the court to overturn the grounding order. The court obliged, saying the order had been improperly served, and the plane promptly took off for Moscow.

Last week, a month after the plane left Sri Lanka, the nation’s president, Gotabaya Rajapaksa, tweeted about a phone call with Putin.

“While thanking him for all the support extended by his gvt to overcome the challenges of the past, I requested an offer of credit support to import fuel to #lka in defeating the current econ challenges,” he tweeted, using an abbreviation for Sri Lanka.

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AerCap isn’t the only leasing company affected. Maeots, the chief executive of Estonian company Magnetic MRO, said that before the invasion, he had four Boeing engines leased to a Russian airline. With the imposition of European export controls, he had one month to get them back. The Russian airline simply refused to return them. “My assets are still there,” he said.

Even if the companies eventually regain the planes, that’s not the end of their worries, said Jason Dickstein, the general counsel of the Aviation Suppliers Association, a U.S.-based group representing aircraft parts distributors. Because Russia has given its domestic companies permission to try to produce spare parts for the planes, it’s likely the planes will contain parts that haven’t been submitted to rigorous inspection by Western agencies.

“There is a fear among leasing companies that if and when they ever recover [their planes] they won’t be able to use them because they won’t be able to verify their air worthiness,” he said.

Farisz reported from Colombo, Sri Lanka.