Following Russia's invasion of Ukraine in February 2022, global sanctions lists have expanded dramatically and additions are being made regularly. New sanctions have taken aim not only at Russia's war machine, but also those closely connected to the Kremlin, Russia's central bank and Russia's broader economy. Some sanctions and export restrictions go so far as to target persons "connected with" Russia or equipment operating in or from Russia. The immediate impact of these sanctions upon oligarchs' private yachts and jets is well publicised, with images of seized yachts and jets splashed across the press.

However, what about those financing such assets? What should banks and other financiers look out for and prepare against in the context of these sanctions? As ever, the devil is in the detail with sanctions. However, the following suggestions should give financiers some food for thought and provide a useful starting point for considering how existing financings may be affected.

1. Which sanctions apply?

The first question any financier should ask is, what sanctions are applicable to the deal? The starting point will be to consider with which sanctions the financier itself is required to comply. However, it is also critical to consider the wider impact of sanctions upon transaction parties and other persons involved in the deal, such as banks through which remittances may be made.

2. Are any transaction parties, or the Ultimate Beneficial Owner (UBO), the subject of any sanctions?

It follows that a financier will need to determine whether their counterparty is affected by any sanctions. This will entail regularly checking applicable sanctions lists to see if any transaction parties, the UBO, or any other controlling or related persons have been added. Naturally, if sanctions do apply, this may require termination of the financing, either as an express requirement of the sanctions  themselves (for instance, EU aircraft leasing companies were required to terminate leases to any person, entity or body in Russia or for use of the aircraft in Russia) or as part of the financier's wider risk and reputation management policies. Application of sanctions will doubtless also have an adverse impact upon the value and liquidity of any security. A financier will most likely not be permitted to receive US dollar or euro denominated payments from a US or EU sanctioned person.

3. Do sanctions indirectly affect performance of an existing financing?

Even if a transaction party or UBO is not directly affected by sanctions, ongoing performance of the financing may be indirectly affected. For instance, can the counterparty continue to pay if their bank is the subject of sanctions? Can the counterparty still obtain adequate insurance of the asset? Do sanctions prevent the upkeep, maintenance and operation of the asset? For instance, maintenance providers or suppliers may refuse to perform work, or may be unable to source suitable parts, thereby potentially leading to the disrepair and depreciation in the value of the asset.

Likewise, a yacht's flag state usually sets requirements for minimum manning and planned maintenance. Once a yacht is seized, if a crew walks away because sanctions prevent the payment of their salaries, or if sanctions prohibit maintenance, then pollution incidents become more likely. Although the issue remains unclear, secured financiers should be cognisant of the risk of being required to bear responsibility for such pollution incidents.

Furthermore, aircraft, ships and yachts owned by persons "connected with Russia" may be the subject of "movement directions" or overflight restrictions, notwithstanding that their owner or operator is not specifically named on any sanctions list. Clearly, preventing a yacht or aircraft from leaving its present location is likely to have a significant detrimental effect on maintenance and upkeep, as well as any income streams generated by the asset.

4. Where is the asset registered?

In response to sanctions, many ship and aircraft registries have taken steps to deregister ships and aircraft (or to revoke certificates of airworthiness). It has been well publicised that Russia has taken steps to permit aircraft previously registered overseas to be re-registered in Russia (often in breach of international conventions). Some commentators have noted that this could potentially be construed as confiscation by the Russian authorities, and numerous insurance claims have been lodged by lessors of commercial aircraft as a result.

Further, any such deregistration (and potential re-registration) of an aircraft is likely to be a breach of the terms of a secured financing, and will also potentially void insurance cover. Revocation of an aircraft's certificate of airworthiness will also have a negative long-term impact upon the value of that aircraft. Similarly, if a vessel is seized it may no longer be in Class and under flag, and insurance is likely to be revoked.

From a practical perspective, financiers should also consider whether the jurisdiction in which the relevant asset is registered can be considered a "friendly" jurisdiction (i.e. one in which the authorities will cooperate with a financier seeking repossession). It goes without saying that, at present, many financiers and lessors of aircraft that have been re-registered in Russia do not expect to be able to recover them any time soon.

5. Similarly, where is the asset physically located?

Consideration should be given to the legalities and practicalities of seizing and repossessing an asset in the jurisdiction where it is physically located. What legal rights (or self-help remedies) does a financier have in that jurisdiction? What steps can the authorities take to seize an asset and what must the financier do to facilitate that (for instance, by obtaining a court order), whether to enforce sanctions or for the benefit of a financier seeking repossession? How long will the process take, and are the local authorities likely to be responsive and cooperative? Given all of the above, it is therefore crucial to obtain local legal advice in the relevant jurisdiction.

Clearly, there will be a wide spectrum of approaches taken by various local authorities. As has been widely reported, some jurisdictions are taking a proactive approach to seizing assets (for instance, the US's recent seizure of a superyacht detained in Fiji), while others are being more conservative. Similarly, the relevant jurisdiction's experience of dealing with asset seizures or repossessions will have an impact. Even if a particular jurisdiction is "friendly", lack of experience on the part of local lawyers and officials may delay or hamper matters.

It will come as no surprise that since the start of Russia's invasion of Ukraine, many private jets and yachts were swiftly relocated to places such as the UAE and Turkey, where it is perceived that seizure or repossession will be more difficult. Likewise, tracking an asset can sometimes prove difficult, and may lead to a game of cat-and-mouse, whereby an asset is repeatedly moved from one jurisdiction to another before meaningful steps can be taken to seize or repossess it. Indeed, there have been many reports of superyachts' Automatic Identification Systems (AIS) being switched off precisely for that purpose.

6. What happens next?

Depending on the answers to the above questions, and the precise impact of sanctions in the particular circumstances, a financier will also have to consider the medium and long-term impacts of sanctions on their deal. Assuming a financing cannot continue, can the asset be recovered, maintained and successfully remarketed to cover losses? If an asset cannot be recovered, will an insurance claim succeed? Can other security be realised instead?

Clearly, the above considerations represent just the tip of the iceberg when it comes to the impact of sanctions. The effect on a particular financing, and the potential strategy of a financier to mitigate their impact, will require detailed analysis and advice. Dentons has global aviation, shipping and sanctions specialists on hand to assist with any questions you may have.