The second package of EU sanctions against Russia, introduced because of the military special operation in Ukraine, will also affect the market for aviation products and the energy sector. This was stated on February 25 by the head of the European Commission (EC), Ursula von der Leyen, following a discussion in Brussels.
She explained that this is a ban on the export, sale, supply or transfer of “all aircraft (AC), aviation components and equipment to Russia.” As part of the sanctions against the Russian energy sector, the European Union (EU) will ban the export of European technologies for oil refining. “These tools are unique, since they are produced only in our country, they cannot be supplied from other places,” she added (quoted by TASS). As a result, Russia, in her opinion, will not be able to modernize its refineries, which in 2019 brought her revenues of €24 billion. The exact wording of the restrictions is still unknown, they still have to be approved by the EU Council.
Landing planes
The largest passenger airlines in Russia in 2021 were Aeroflot, Pobeda and Rossiya (both members of the Aeroflot group), as well as S7 (Siberia) and Ural Airlines. Together, these five companies accounted for 65.6% of all passenger air transportation last year, follows from the data of the Federal Air Transport Agency. According to the Aeroflot Group, as of September 30, 2021, there were 352 aircraft in the fleet of the group’s companies, of which only 67 are Russian – Sukhoi Superjet 100. The S7 group has 97 aircraft in the fleet, none of them are Russian at all. There is no information about the companies’ plans to upgrade the park. Last year, the S7 group reported that its subsidiary low-cost carrier will begin flights in the summer of 2022 with a fleet of eight new Airbus A320Neo, in 2023 their number should double. The fleet of Ural Airlines has 54 aircraft, according to the data on the airline’s website (there is no domestic equipment).
Large Russian airlines do not own foreign ships, except for isolated cases, notes Fyodor Borisov, an expert at the Higher School of Economics. Among the leasing companies with which the Aeroflot group works, the share of domestic ones is quite high – these are both STLC and other Russian operators, says Oleg Panteleev, director of the Aviaport industry agency. At the same time, deals with Aeroflot are structured through foreign subsidiaries of STLC. Other airlines, he said, mainly use the services of European and Chinese lessors.
So far, there is no document that details the operation of the ban mechanism, so it is difficult to draw any conclusions, says Borisov. “If only the direct purchase of aircraft is restricted, then nothing will happen, since Russian operators mainly lease aircraft,” he told Vedomosti. But the restrictions will also apply to leasing companies, Kommersant reported with reference to the draft clarifications to the package of sanctions.
It explains that the ban on sales, supply, transfer or export, directly or indirectly, includes all types of aircraft, helicopters, as well as their parts and components (engines, etc.). “It also covers aircraft leasing as it is a form of ‘delivery’. Therefore, new leasing contracts cannot be concluded, and existing ones must be terminated,” the document says.
According to a Vedomosti source in one of the Russian airlines, it is already clear almost for sure that air carriers from the Russian Federation will not receive new European aircraft this year. Airbus deliveries in 2022 were planned to Aeroflot, S7 and its low-cost carrier Citrus, Ural Airlines, Smartavia, Azimut and Iraero.
Borisov also draws attention to the fact that a direct ban on Airbus from selling new aircraft destined for Russia to the leasing company may be introduced. “The question is what sanctions will be applied to leasing companies and spare parts suppliers,” adds Borisov.
Vedomosti sent inquiries to the airlines.
Titanium Addiction
Russia has already begun to respond to the actions of the US and the EU by introducing counter-sanctions.
In particular, the ban on Aeroflot flights to the UK led to a “mirror” response: the Federal Air Transport Agency closed the sky over the territory of the Russian Federation to British aircraft. Theoretically, the sanctions could be extended, for example, to include the supply of titanium products critical for the aviation industry. And although such a development of events is unlikely, Oksana Lukicheva, an analyst for commodity markets at Otkritie investitatsiya, believes, it could create serious problems for Russia’s foreign partners.
The Russian corporation VSMPO-Avisma, whose main owners are the structures of Mikhail Shelkov (65.27%) and the state corporation Rostec (holding a blocking stake), is the world’s largest titanium producer. The company occupies up to a quarter of the world market. According to expert estimates, it provides up to 35% of all titanium needs for Boeing, 65% for Airbus, and 100% for Embraer. In 2020, VSMPO-Avisma exported 66% of the volume of products produced, or 16,701 tons, follows from the company’s annual report (the report for 2021 has not yet been published). The main volume of foreign deliveries, in total more than 80%, fell on the USA and EU countries. In December 2020, the US Department of Commerce already tried to include VSMPO-Avisma in the list of “military end-users” (military end-user list), which are prohibited from transferring American technologies, but in January 2021 this decision was canceled.
The introduction of restrictions on the supply of VSMPO-Avisma products will lead to an increase in titanium prices on the world market and may cause global disruptions in its production, Lukicheva believes. She believes that it will not be easy to replace the products of the Russian enterprise, even taking into account the growing competition in the titanium market. “The company manufactures complex titanium products – forgings, stampings and rolled products,” she explains. The expert emphasizes that in addition to the aviation industry, the chemical industry, energy, medicine, and the oil and gas industry also need titanium.
Will Russia be able to modernize the refinery?
Russia is implementing a large-scale modernization program for oil refineries (ORs). At the end of 2020, a law was passed to encourage companies to invest in refinery upgrades. To do this, businesses sign investment agreements with the Ministry of Energy on the construction or reconstruction of deep oil refining units, under which until 2031 they can receive an increased tax deduction as part of the refundable excise tax on oil.
Last spring, the Ministry of Energy signed investment agreements with 14 oil refineries, including the Rosneft and Gazprom Neft refineries, with a total investment of 800 billion rubles. in the period up to 2026 (Vedomosti wrote about this on April 14, 2021). The program provides for the creation and modernization of 30 units, the launch of which will increase the production of gasoline of ecological class K5 (corresponds to Euro-5 parameters) by about 3.6 million tons, the production of diesel fuel of class K5 – by more than 25 million tons per year. According to the Central Dispatch Department of the Fuel and Energy Complex, over the past year, the Russian Federation increased the volume of oil refining by 3.9% – up to 280.7 million tons, gasoline production increased by 6.1% – up to 40.8 million tons.
In March 2021, the Russian government also authorized the modernization of deep oil refining units at refineries using agreements on the protection and promotion of capital investments (guaranteeing non-aggravation of conditions, including fiscal ones, for a specific project).
At the same time, experts interviewed by Vedomosti say that the main peak of the modernization of Russian refineries, which occurred in 2010–2019, has already been passed.
“Therefore, if the sanctions concern only new facilities, they will affect a limited number of companies,” says Mikhail Burmistrov, CEO of Infoline-analytics. The expert added that Russian companies will be able to purchase analogues of European equipment, for example, in China. But in the future, due to the lack of imported components, it may be difficult to overhaul and maintain equipment already operating at Russian refineries, objected to Anton Usov, head of international practice at KPMG.
In his opinion, the new EU sanctions could affect almost the entire sector in Russia, especially refineries with modern deep oil refining units. General Director of the National Energy Security Fund Konstantin Simonov agrees with him: “Problems can indeed arise at the stage of equipment repair, as well as with access to foreign software.”
Vedomosti sent inquiries to the Ministry of Energy, the Ministry of Economic Development, the Ministry of Industry and Trade and the largest oil companies.