The impact that expanded EU sanctions might have on the aviation industry, as well as what steps can be taken to mitigate the risk of being in breach of the sanctions and the possible consequences of violating those sanctions, must be considered by all companies doing business in the EU (including EU-incorporated subsidiaries of non-EU based companies) involved in the aviation industry.

In response to recent developments in eastern Ukraine, the EU expanded its restrictive measures against Russia by implementing a third phase of sanctions, which target specific sectors of the Russian economy, as well as additional individuals and entities. Russia’s capital markets, energy and defence sectors have all been targeted by the sanctions which came into force on 1 August 2014 and are currently due to expire on 31 July 2015 (Council Regulation (EU) No 833/2014) and the most recent amendments and additions to those sanctions that came into force on 12 September 2014 (Council Regulation (EU) No 960/2014). Read more in our general client briefing on the EU, US and Canadian sanctions against Russia.

To whom do the sanctions apply?

The Regulation applies:

  • To nationals of EU Member States (wherever located).
  • To any legal person, entity or body, established in an EU Member State or otherwise constituted under the law of a Member State (including the subsidiaries of non-EU persons, entities or bodies).
  • To any legal person, entity or body in respect of any business done in whole or in part within the EU (including the branches of non-EU persons, entities or bodies).
  • Within the territory of the EU (including airspace) and on board any aircraft or vessel under the jurisdiction of a Member State.

How do these sanctions affect the aviation industry?

Although the aviation industry is not specifically targeted by these sanctions, there are a number of provisions which may have an impact on certain areas of the industry. In particular, EU nationals, EU companies, or companies doing business in the EU and involved in the aviation industry, must be aware of the potential effect of these sanctions on their business.

Capital market financing

One of the key aims of the sanctions is to restrict Russia’s access to EU capital markets. To that end, Regulation (EU) 833/2014 restricts EU nationals and companies from entering into certain capital market financing with five state owned financial institutions, Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB) and Rosselkhozbank, or their 50% or more owned subsidiaries or persons acting on their behalf. The Regulation prohibits the purchase or sale of shares or other equity, bonds or similar financial instruments issued by these listed institutions or any of their subsidiaries established outside the EU, which have a maturity in excess of 90 days (Article 5). Regulation (EU) 960/2014 has clarified that this prohibition applies as of 12 September 2014 to those instruments having a maturity exceeding 30 days.

It should be noted that the Regulations do not apply to subsidiaries of those listed institutions that are established within the EU, which means those subsidiaries would not be restricted in accessing EU capital markets. However, if those subsidiaries are deemed to be acting on behalf of the listed institutions, then the Regulations do apply. To what extent the Regulation will therefore hamper those listed institutions or their subsidiaries from providing finance to, for instance, Russian airlines, remains to be seen.

In addition, Regulation (EU) 960/2014 has now prohibited being directly or indirectly part of any arrangement to make new loans or credit with a maturity exceeding 30 days to the institutes listed after 12 September 2014. However, this is subject to the caveat that loans or credit are permitted if they have a specific and documented objective to provide financing for non-prohibited imports or exports of goods and non-financial services between the EU and Russia. Further, for entities that are established in the EU and are 50% or more owned by any of the listed financial institutions, it is also permissible for loans to have the specific and documented objective of providing emergency funding to meet solvency and liquidity criteria for those entities. Therefore, financing of aircraft to Russia, through, for instance, syndicated loans in which one of the listed institutions or their subsidiaries have a participation, is still permissible. Nevertheless, regard would still need to be had to the potential impact of US sanctions or sanctions imposed by other relevant jurisdictions which could affect the ability to syndicate the loan.

In addition, the current EU Regulations do not appear to prohibit aircraft financing structures in which loans are made to Russian state banks which then in turn lend or provide guarantees to Russian companies. Again, if such a transaction is being contemplated, the potential effect of US and any other relevant sanction regulations must be considered.

The provision of ECA insurance is only restricted in relation to the provision of such insurance for the supply of military equipment, dual-use equipment (i.e. with a dual military or non-military use) and certain listed technology for the Russian oil industry. This should not impact ECA financing of non-military aircraft to Russia.

Dual-Use Goods

Regulation (EU) 833/2014 prohibits the export of dual-use goods and technology to Russia, if those goods or technology are intended for a military purpose or if the end user is the military. Of specific interest to the aviation industry is that categories of dual-use goods include navigation equipment and avionics as well as aerospace and propulsion equipment (Category 7 and 9 of Annex to Council Regulation (EC) No 428/2009). Licences must be obtained from the relevant Member State authorities for the export of goods that fall within those categories. However, where the authorities have reasonable grounds for believing that either the goods will be used for a military purpose or that the end user (not simply the entity to whom goods are provided or a contractual counterparty) is the Russian military, no licence will be given.

In addition, Regulation (EU) 960/2014 stipulates that no dual use goods and technologies are to be sold, supplied, transferred or exported to the specified defence companies in Annex IV to the Regulation. Neither is it permissible to provide technical or financial assistance in relation to these goods and technologies. However, the Regulation provides that the new prohibitions do not apply to dual use good and technologies intended for the aeronautics or space industry.

Designated individuals and entities

Specified individuals and entities are subject to asset freezes and visa bans (Council Regulation (EU) No. 269/2014 as amended). The consequences for financing deals which involve persons or entities that become subject to these sanctions can be significant. If such an event does not constitute an event of default pursuant to the contractual provisions, it would in any event present significant practical difficulties. For instance, there would be issues with dealing with payments from and to such individuals or entities. HM Treasury has recently stipulated that any money received in the UK or in a UK bank anywhere in the world which has come from a person or entity outside the EU that is subject to sanctions must be held in a suspense account. In order to release those funds, a licence will be required from HM Treasury.

The crippling effect that being placed on the sanctions list can have was illustrated by Dobrolet, a low cost subsidiary of Aeroflot, which temporarily suspended its services. Dobrolet was flying solely between Moscow and Simferopol in the Ukraine and found itself on the sanctions list. Consequently, its aircraft have been grounded, reportedly as a result of EU insurance being annulled, aeronautical information not being provided and technical support from EU maintenance providers ceasing. In response, Aeroflot has recently announced that it will set up a new low cost subsidiary for the winter season.

Crimea and Sevastopol

There are also specific sanctions which target trade and investment in Crimea and Sevastopol (Council Regulation (EU) No. 825/2014). In particular, one of the aims of these sanctions is to prevent the creation, acquisition or development of transport infrastructure in these areas. It is therefore prohibited to make new investments in relation to such projects (such as advancing loans or credit, Article 2 (a) 1(a)), or to sell certain specified equipment and technology which could be used for such infrastructure projects (Article 2 (c)).

It should be noted that the sanctions in these Regulations do not have a retrospective effect and so do not affect contracts that are already in existence. These sanctions are also covered in our general brief.

Russian response to sanctions

Russia has responded by introducing retaliatory sanctions, which may ultimately affect the aviation sector. It has been rumoured in the press that as a consequence of the latest sanctions, Russia is considering closing its airspace to EU and American carriers.  If that does occur, this will have a significant impact on the cost of flying routes from Europe to Asia.

Precautions that should be taken

It is important to have appropriate due diligence systems in place in order to be able to establish that parties to transactions are not sanctioned entities. Be alert to issues that are raised through due diligence which will require further investigation, for example, a borrower situated in a jurisdiction which is not subject to EU sanctions and who refuses to sign up to sanctions provisions in the contract may warrant further investigation.

EU sanctions provide a limited defence if the EU entity did not know, and had no reasonable cause to suspect, that its actions would infringe the sanctions. In the context of a company in the aviation sector transporting cargo goods in breach of sanctions, a failure to carry out sufficient due diligence, a failure to have in place adequate systems and controls to detect such a breach, or the wilful turning of a blind eye to breaches of sanctions is unlikely to meet the required standard for the limited defence.

In addition, consider inserting appropriate sanctions wording into contractual documentation, agree how risk is to be allocated between the parties and the contractual consequences of a breach.

Consider what procedures the parties need to have in place during the contractual term to monitor any potential risk – including any changes to the sanctions regime, which may make further performance impossible. Consider where the risk should fall in such circumstances.

Consider all the jurisdictions that may be involved in the transaction, this may relate to assets involved or the parties to the transaction. Such other jurisdictions may have their own, possibly different, sanctions regime that could have an impact on the transaction.

Consequences of being in breach of sanctions

Although the EU Regulations are directly applicable in all Member States without further national legislation being required, the EU leaves it to each Member State to legislate what the penalties are for breach of the sanctions. In the UK, it is a criminal offence to breach the prohibition on dealing with transferable securities and money-market instruments. The penalties include a possible jail term of up to 2 years and/or a fine (The Ukraine (European Union Financial Services) (No. 3) Regulations 2014, section 6). These penalties are the same as those imposed for breaching the asset freeze on specified individuals and entities (The Ukraine (European Union Financial Services) (No. 2) Regulations 2014, section 12).

In relation to the restrictions imposed by the Regulations on the prohibitions on dual-use goods, the penalties for breaching those provisions include a fine and/or a jail term - The Export Control (Russia, Crimea and Sevastopol Sanctions) Order 2014 (the 2014 Order), which came into force on 26 September 2014). Sentences range from 6 months to 10 years depending on the offence. Note that the 2014 Order has not yet criminalised breaches of the latest trade sanctions under Regulation 960/2014. Amendments to the 2014 Order in this regard are currently being considered by the Export Control Organisation.

The sanctions do provide for a limited defence if the EU person or entity did not know, and had no reasonable cause to suspect, that its actions would infringe the sanctions. Accordingly, there may be contractual (or other) steps an innocent entity can consider to maximise its ability to rely on this defence, however this will depend on all the circumstances of the transaction. Deficiencies in due diligence procedures or systems and controls that fail to identify a sanctioned transaction are unlikely to support a knowledge based defence. It is also important to note that any intentional attempt to circumvent the sanctions is prohibited.


EU sanctions are drafted in wide and sometimes imprecise terms with limited associated guidance. There is often uncertainty as to how European courts will interpret the restrictions set out in the EU sanctions legislation.

In light of the on-going expansion of EU sanctions in connection with events in Eastern Ukraine, companies in the aviation industry that are potentially affected by EU sanctions should undertake on-going risk assessments to ensure they are not contravening the EU sanctions regime. This includes bearing in mind potential future risks, since any broadening of the sanctions could significantly impact transactions.

However, the president of the European Council has in a statement released on 11 September 2014 stressed the reversibility and scalability of these EU sanctions, suggesting that changes in the political climate could also lead to amendments or suspensions of the current sanctions in force.

This briefing is an analysis of EU sanctions. In the context of all sanctions issues, the United States’ framework is extremely significant and should be considered at the earliest opportunity. We work closely with our colleagues in Washington, DC who have significant experience of advising global corporates and financial institutions in connection with the impact of US economic and trade sanctions.