2014-09-23_8-57-24The tightening sanctions on Russia are now starting to work through the economy.  Aerospace is now a victim of these sanctions.  But not in the way you would think of at first.  Sanctions are hurting Russian aerospace sales.

UT-Air Express is a Russian airline with orders for SSJs.  The image is of one these aircraft at Farnborough in July.  The airline has six SSJs on order, but will only be able to take one this year.  Russian banks do not have access to low cost Western capital and this is constraining their ability to finance another three due for delivery.

The Russian central bank is able to offset some of the external capital from western banking, but it will run out of capital before the western banking system.  UAC is a national champion and we expect to see the Russian state provide support to ensure sales and operations.  How long can Russia keep this up?

Certainly the potential cutting off Russian to EU and US airlines is a threat. But were this to to start, Aeroflot would see a huge decline in its revenues because overflight fees go to Aeroflot.  Would the Russian central bank step in and make up that loss too?  The EU airlines that would see the largest disruptions, in our view, would be and SAS.  These two would see the greatest rise in costs, while the others would see somewhat higher costs flying the longer southern route.

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