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. Last Updated: 07/27/2016

State Offers $1Bln to Cover Airlines

Itar-TassAeroflot, which says it controls 67.2 percent of the market for international flights, urged the government to offer the gaurantee.
The government threw its weight behind Russian carriers flying abroad on Thursday, offering $1 billion in gaurantees to meet new premiums for risks of terrorist acts or war.

Receiving the state guarantee became pivotal after international insurers slashed third-party liability coverage for war risks from between $1 billion and $2 billion to $50 million on the heels of terrorist attacks on New York and Washington on Sept. 11.

The new limits on coverage, in effect since Tuesday, confine airlines from operating internationally -- and many governments have already moved to bridge the gap by offering guarantees. Urged by flaghsip carrier Aeroflot, the Russian government followed suit, and approved a draft law to make related changes to the 2001 state budget.

In Russia, as many as 60 airlines operate regular international and charter flights, according to the State Civil Aviation Service.

The government was to send the gaurantee for approval to the State Duma on Friday, said Deputy Transportation Minister Karl Ruppel. If the measure is passed by the Duma, it goes to the Federation Council for approval before being signed by the president.

Ruppel said the guarantee will be effective for a month to give the insurance market time to figure out how to offer the coverage.

Transport officials hope state support will send a signal to the world that Russia is addressing the situation. "The government's decision should placate fears of the insurance community and civil aviation authorities in other countries," Ruppel said Thursday by telephone.

"We are shortly notifying all aviation authorities and hope they will understand and support us starting today while the mechanism is being formed."

The $1 billion state guarantee will be administered by the Moskva insurance company, which is by 75 percent owned by Aeroflot.

Moskva was picked partly because it already insures all of Aeroflot's aircraft and was offering its services at no commission, Ruppel said. Aeroflot holds 62.7 percent of the international market among Russian airlines, according to its own estimates.

Ruppel said the lack of time was also taken into account, and Moskva was already well prepared to service the government-backed insurance.

"We have worked for almost a week now with Moskva on how to resolve this problem," Aeroflot's chief financial officer, Alexander Zurabov, said after the government meeting. "And they have the type of insurance product, i.e. the text of the insurance policy, already prepared that will be accepted by the Western market."

However, other Russian insurance companies said an airline can get an insurance policy with any amount of coverage.

"At the moment, we can provide insurance against war risks up to $1 billion -- but for higher tarriffs, of course," Interfax quoted Ilya Kabachnik, executive director of Avikos aerospace insurance company, as saying.

The director of the Afes insurance company, Vladimir Korytkin, was quoted by Interfax as saying that his company also could offer policies with the required amount of liability.

Both companies were surprised that guarantee were given to Aeroflot's subsidiary alone.

While insurance companies adjust their policies, the airlines' premiums will soar, Zurabov said.

"No one is yet ready to give estimates how much increasing liability will cost airlines, but it's clear it will be a serious burden."

To secure the $50 million third-party liability coverage, airlines had to pay $1.25 per passenger. Before, Aeroflot paid 30 cents, now that it has risen its liability threshhold to $150 million, this premium had increased to $1.60.

"If it increases further to $3 per passenger, it will hike our current $13 million insurance expenses by another $15 million," Zurabov said.

To cover its insurance-related expenses and increased spending on safety measures, as of Nov. 1 Aeroflot is introducing a $5 duty on both domestic and international flights, said Aeroflot's commercial director, Yevgeny Bachurin.

United Financial Group transportation analyst Yulia Zhdanova said this was not a very big increase for passengers, and will improve Aeroflot's image for stepping up safety.