Runway cleared for aviation financing in Russia

The 2001 Cape Town Treaty is a key part of the global legal framework for aircraft equipment financing. It aims to reduce the risk involved in the sector by providing creditors such as banks and aircraft leasing companies with remedies in the case of default or insolvency by a debtor such as an airline.

Most significantly, the treaty allows creditors to seize the leased aircraft of an indebted or bankrupt airline and move them to a different country, regardless of where they are registered. This represents a significant shift as, before the treaty existed, creditors found seizing and exporting a debtor’s aircraft very difficult or impossible in many countries, including Russia.

Furthermore, the treaty created an International Register – a worldwide, online database where all aircraft security and leasing interests are recorded and made available to all for information purposes.

More than 40 countries are already party to the Cape Town Treaty, including major aviation countries such as India, China, and the United States, as well as others that play a key role in international aviation financing, such as Ireland and the United Arab Emirates. A number of European Union countries are also well advanced in ratifying the treaty.

Benefits for Russia

Until now, the growth of the aircraft financing industry in Russia has been limited by what banks and leasing companies have perceived as a lack of protection under Russian law. The problem has become more acute as lenders and lessors have moved from providing corporate finance to an airline to directly financing the assets.

At the same time, Russia’s airline industry is growing rapidly, meaning that more and newer aircraft are greatly needed. To satisfy this demand, the sector needs to attract capital from international markets which have high capacity and offer a diversity of financial instruments. Russia’s accession to the Cape Town Treaty is expected to provide a major boost in this direction.

Support from the EBRD

The EBRD started working with the Russian government on this issue in 2002, consistently highlighting the benefits that the treaty could bring to the Russian aviation sector. The Aviation Working Group, a not-for-profit group of aircraft makers, leasing companies and financial institutions, was also involved and shared its (increasingly growing) experience in the ratification process in other jurisdictions. Law firm White & Case Moscow and the Russian United Aircraft Corporation also worked with the EBRD on the issue.

Initially, there was resistance on the part of the Russian authorities to the idea of ratifying the treaty. But after several major aviation countries joined the treaty, the mood in Russia slowly began to change.

Lead Counsel Frédérique Dahan from the Legal Transition Team; Senior Banker Florence Bachelard-Bakal from the Manufacturing Services team; Managing Director for Industry, Commerce and Agribusiness Alain Pilloux; and Managing Director for Russia Natasha Khanjenkova led the EBRD’s work on Russian accession to the Cape Town Treaty.

A major part of the EBRD’s effort involved working with the Ministry of Economic Development on the Accession Law – the domestic legislation needed to bring the treaty into effect in Russia. In particular, the EBRD has been collaborating with the authorities on a set of amendments to the Accession Law that are crucial to harnessing the full economic potential of the Cape Town Treaty.

From 1 September 2011, the treaty’s provisions will be directly applicable and reflected in contracts governed by Russian law and will be enforceable by Russian courts.

The project was funded through the EBRD Shareholder Special Fund.

By Mike McDonough

 

Last updated 28 June 2011