The No Russia Clause in Aviation Finance Transactions

The EU’s 12th sanctions package against Russia came into force on 19th December 2023, introducing further provisions to combat the circumvention of existing sanctions in Regulation (EU) 833/2014 (Reg 833). The purpose of this sanctions package* was to target the Russian diamond trade and oil tanker sales but it also introduced new re-exportation restrictions on goods that may assist the Russian war machine, including aviation assets.

*EU's 12th Sanctions Package and New UK Trade Sanctions on Russia

This therefore impacts on stakeholders in aviation finance and leasing, as parties seek to understand and comply with the restrictions. These are EU sanctions and similar restrictions have not been implemented by the UK or USA at this time.

The key provision is Article 12g, which provides the following:

1. EU companies and others subject to EU Law must include in contracts relating to export transactions with customers in third countries a clause that obliges exporters as of 20th March 2024 to contractually prohibit the re-export of certain categories of sensitive goods to Russia, including goods related to aviation, jet fuel, firearms, and goods on the Common High Priority list within Reg 833 (the so called ‘No Russia Clause’).
2. The obligation above does not apply to contracts executed before 19th December 2023, which are granted a grace period for compliance until 19th December 2024;
3. Exporters must ensure that any agreement with the third country counterpart contains “adequate remedies” in the event of a breach of a contractual obligation implementing the prohibition on re-export to Russia;
4. If the third country counterpart breaches any of the contractual obligations in accordance with paragraph 1, exporters must inform the competent authority of the member state where they are resident or established as soon as they become aware of the breach; and
5. Member states shall inform each other and the Commission of detected instances of a breach or circumvention of a contractual obligation in relation to re-export to Russia.

Certain partner countries, including the USA, Japan, UK, Norway and Switzerland are exempt from this requirement. Article 12g has clear application to a traditional export arrangement, but its application to aircraft leasing is less clear. It is important for parties to aircraft leases to consider the requirement of No Russia Clauses in relation to current and future transactions but also previous transactions, making any necessary changes before the long-stop date in December 2024.

The EU issued guidance on 22nd February 2024, in the form of a set of Frequently Asked Questions and a form of suggested (but not prescriptive) wording, but this has left some uncertainty in the context of aviation finance transactions.

Who is affected?

The No Russia Clause will apply to an EU exporter (which may include airlines and lessors) who is  “selling, supplying, transferring or exporting” the targeted goods. This is likely to be widely construed as catching sale agreements, as well as finance and operating leases. Given the range and different levels of restrictions in different types of lease, account must be taken of the nature of transaction and what is needed for each type of lease to comply with Article 12g.

What must an Exporter do?

Exporters potentially falling within the definition of exporter within Article 12g must review their existing contracts to check if they achieve the purpose of the new regime. In essence, it is advisable to undertake a thorough review of whether existing illegality and sanctions provisions are sufficient to constitute a No Russia Clause and if not, it may be necessary to seek amendments to those arrangements.

The provision requiring imposition of “adequate remedies” is a fundamental concern. The FAQs provide remedies should be “reasonably strong and aim to deter non EU operators from any breaches”. The Remedies to be considered are termination of the contract for event of default and payment of a penalty.

Negotiating No Russia Clauses

The EU has stated that exporters are free to choose the appropriate wording for No Russia Clauses, as long as the outcome meets the objectives. The Commission has provided draft wording for guidance, and which is being used as a starting point in some cases, but we note this covers issues that may not be appropriate or reasonable for lessors and lessees in this market. As an example, the draft clause provides that importers/buyers shall set up and maintain an adequate monitoring mechanism, yet there is a lack of clarity on what this would look like in practice and this is not specified in Article 12g itself. 

There is therefore currently no “one size fits all” No Russia Clause and each case must be assessed as a balance of risks between the parties. Clearly lessees and lessors will be keen to ensure they are taking reasonable steps and acting within the guidance and industry norms, although without precedent and limited official guidance, it will be important to see how this issue develops in practice. Clearly re-negotiation and reallocation of risks in old transactions may be more challenging than for new transactions.

What are the consequences for failure to act?

The likely consequences of a sanctions breach are serious with enforcement in the form of financial penalties.  If an aircraft the subject of a transaction finds its way to Russia further down the chain, there may be scrutiny of what parties have done in respect of No Russia Clauses, how much due diligence it has carried out and the attention it paid to implementing Article 12g while it had some leverage or control over the location of the aircraft.

If you have any questions about this and would like specific advice please contact our aviation finance team.