10 Boeing 777s Sold to Aeroflot (Be Wary)

January 24, 2023 by Leave a comment

Reuters is reporting that Aeroflot recently purchased 10 Boeing 777 aircraft that it previously had on lease.  They purchased the aircraft from the Irish lessor. 

What makes this transaction unusual? Aeroflot is subject to a Temporary Denial Order that would appear to make a transaction like this illegal (absent a US export license).

Boeing 777 aircraft are produced in the United States and are therefore subject to U.S. export and re-export standards.  The ownership of the aircraft does not matter to this assertion of jurisdiction over re-exports – so long as it remains an aircraft that was produced in the United States it is subject to U.S. export and re-export standards..

On April 12, 2022, the United States issued a Temporary Denial Order (TDO) affecting Aeroflot (the TDO was renewed in October).  Under that TDO, Aeroflot may not buy any item subject to the EAR (like an aircraft) that was previously exported from the United States.  In fact, the TDO also prevents them from even negotiating to acquire such an asset. Typically Aeroflot would also be forbidden from applying for licenses for transactions but there is an exception to this clause that permits them to apply for a BIS for transactions directly related to safety of flight.  So it is possible that the transaction was licensed by BIS, but the news articles we’ve been able to find do not provide this information.

There is a corollary provision in the TDO that also makes it illegal to facilitate acquisition by Aeroflot of ownership of items like aircraft.  This also permits a license to be issued for safety of flight transactions. This side of the restriction would seem to make the transaction illegal from the lessor’s point of view, as well (unless there was a license of license exception that applied to the transaction).

One news article asserts that the transaction is legal because of a provision in European law that permits such transactions.  This statement may not be 100% accurate because it fails to take into account the US laws that apply to the transaction.  This EU provision would not insulate the companies from compliance with U.S. export laws.  Again, we do not know if a license was sought from the U.S. government that would have permitted the transaction to be concluded in compliance with US BIS export provisions.

Last month, Reuters had reported that such talks were beginning, and a week later Reuters announced that Aeroflot had concluded the transaction.

The Reuters article suggests that the leasing company is a subsidiary of VEB. If this is true then there may be additional problems with the transaction, because VEB is a specially designated nation (SDN) under the OFAC sanctions programs. OFAC sanctions flow-down (apply) to entities that are 50% (or more) owned by an SDN.

ASA members should be careful around transactions like this. If you see others performing transactions like this, then do not assume that you can perform a transaction like this without restriction. On the other hand, bear in mind that identifying the applicable restrictions and obtaining the right government licenses can allow you to perform transactions that might otherwise seem “impossible.”

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Russian Temporary Denial Orders are Being Renewed

October 6, 2022 by Leave a comment

The Temporary Denial Orders for Aeroflot, Azur, and UTair are scheduled to be renewed in the Federal Register, tomorrow. This means that the heightened transaction prohibitions continue to apply to them.

As we previously reported, the United States Bureau of Industry and Security (BIS) has issued temporary denial orders (TDOs) against several Russian air carriers. These TDOs effectively prevent both exports to, and acquisitions from, these carriers. The original TDOs were scheduled to expire, but they are being renewed by the U.S. Government. The renewals extend the TDOs for another 180 days.

If the Iran-related TDOs are any guide, BIS will automatically extend each of these TDOs until the conflict that gave rise to the sanctions is over. This could mean that the TDOs stay in place until the conflict in Ukraine is over, but it could also mean that the TDOs stay in place until other conditions are met, like the return by Russia of effective sovereignty and control over territory previously identified as part of Ukraine. Or a new administration could simply decide not to renew them as a matter of policy.

What do the denial orders say? They say that there is an enhanced area of exclusion for these named parties. They preclude applying for many licenses – a major exception to this is that you are allowed to apply for a license for an export that is directly related to safety-of-flight (so there is a licensing path for the aircraft parts industry). … But you still have to obtain the license before you can engage in the transaction.

You are also precluded from taking “any action to acquire from or to facilitate the acquisition or attempted acquisition from <the denied party> of any item subject to the EAR that has been exported from the United States.” When you see this clause in the TDO, it prohibits purchases from the denied party – including purchases that would reflect imports! This is an important element that makes the temporary denial orders different from mere export limits. In order to fit this under an “export” order, the acquisition exclusions are tied to transactions that involved a past export (like Boeing equipment that was previously exported) or to transactions that anticipate a future export or re-export. Because of the global nature of the aviation market, this is effective in covering almost all transactions in part subject to the EAR.

The TDOs typically prevent servicing on behalf of any named <denied party>. This can include installation, maintenance, repair, modification, and/or testing.

If you are considering business that may be affected by a TDO, then read the TDO carefully and identify your compliance path. While there are exceptions for “safety-of-flight,” those exceptions typically require BIS to license the transaction.

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Watch the Temporary Denial Orders that Apply to Air Carriers

July 11, 2022 by 1 Comment

In addition to the normal sanctions, BIS has been issuing Temporary Denial Orders (TDOs) against certain parties who have been caught circumventing sanctions. TDOs impose additional restrictions, and have been issued against a number of Russian and Belarusian air carriers. Many of these TDOs are based on the fact that the license exception that permits aircraft operation into Russian airspace (AVS) does not apply to aircraft registered in, owned or controlled by, or under charter or lease by Russians or Belarusians (15 C.F.R. 746.8(c)(5)); and therefore each operation of an aircraft (that was originally exported from the United States) reflects a separate violation by these carriers.

Here is a short list of SOME of the TDOs issued against airlines. This is NOT intended to be a complete list so please do your own due diligence on every transaction. Each of these is hyperlinked to the relevant Federal Register notice.

What do the denial orders mean? They mean that there is an enhanced area of exclusion for these named parties. They preclude applying for many licenses – a major exception to this is that you are allowed to apply for a license for an export that is directly related to safety-of-flight (so there is a licensing path for the aircraft parts industry).

You are also precluded from taking “any action to acquire from or to facilitate the acquisition or attempted acquisition from <the denied party> of any item subject to the EAR that has been exported from the United States.” When you see this clause in the TDO, it prohibits purchases from the denied party – including purchases that would reflect imports! This is an important element that makes the temporary denial orders different from mere export limits.

The TDOs typically prevent servicing on behalf of the <denied party>. This can include installation, maintenance, repair, modification, and/or testing.

If you are considering business that may be affected by a TDO, then read the TDO carefully and identify your compliance path. While there are exceptions for “safety-of-flight,” those exceptions typically require BIS to license the transaction.

Finally, bear in mind that standard language in the TDOs explains that:

[A]fter notice and opportunity for comment as provided in section 766.23 of the EAR, any other person, firm, corporation, or business organization related to Nordwind by ownership, control, position of responsibility, affiliation, or other connection in the conduct of trade or business may also be made subject to the provisions of this Order.

Nordwind Airlines, Leningradskaya str., building 25, office 27. 28, Moscow region, Khimki city, 141402, Russia; Order Temporarily Denying Export Privileges, 87 F.R. 38704 (June 29, 2022).

This means that related companies can be added to the TDO restrictions. It also means that companies with a “connection in the conduct of trade or business” can be added. This offers an opportunity for BIS to issue a TDO against anyone that they discover circumventing the sanctions (or attempting to circumvent them). Note that even though the provision says “after notice and opportunity for comment,” the regulations permit a TDO to be issued immediately in response to an imminent threat of violation.

As always, use this article as the start for your due diligence; but it should not be the only part of your analysis. These TDOs are issued for 180 days and can be extended, but if more than six months have gone by without an extension, then the TDO may have expired.

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