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Moscow may force European airlines to fly around Russia

Dmitry Medvedev, Russia's Prime Minister.
Andrey Rudakov | Bloomberg | Getty Images
Dmitry Medvedev, Russia's Prime Minister.

Russian Prime Minister Dmitry Medvedev threatened on Tuesday to retaliate for the grounding of a subsidiary of national airline Aeroflot because of EU sanctions, with one newspaper reporting that European flights to Asia over Siberia could be banned.

Low-cost carrier Dobrolyot, operated by Aeroflot, suspended all flights last week after its airline leasing agreement was cancelled under European Union sanctions because it flies to Crimea, a region Russia annexed from Ukraine in March.

"We should discuss possible retaliation," Medvedev said at a meeting with the Russian transport minister and a deputy chief executive of Aeroflot.

The business daily Vedomosti reported that Russia may restrict or ban European airlines from flying over Siberia on Asian routes, a move that would impose costs on European carriers by making flights take longer and require more fuel.

Read MoreAeroflot subsidiary grounded by European sanctions

Vedomosti quoted unnamed sources as saying the foreign and transport ministries were discussing the action, which would put European carriers at a disadvantage to Asian rivals but would also cost Russia money it collects in overflight fees.

Shares in Aeroflot - which according to Vedomosti gets around $300 million a year in fees paid by foreign airlines flying over Siberia - tumbled after the report, closing down 5.9 percent compared with a 1.4 percent drop on the broad index.

At the height of the Cold War, most Western airlines were barred from flying through Russian airspace to Asian cities, and instead had to operate via the Gulf or the U.S. airport of Anchorage, Alaska on the polar route.

European carriers now fly over Siberia on their rapidly growing routes to countries such as China, Japan and South Korea, paying the fees which have been subject to a long dispute between Brussels and Moscow.

Read MoreEU adopts toughest Russian sanctions yet

Vedomosti quoted one source as saying a ban could cost airlines like Lufthansa, British Airways and Air France 1 billion euros ($1.3 billion) over three months, but industry experts said that figure was probably too high.

Avoiding Russian airspace would probably be 25-50 percent more expensive than paying fees for transit, said Russian aviation consultant Boris Ryabok, estimating European airlines would lose around $100-200 million per year, less than the cost to Russia of the lost fees.

Lufthansa said it operates about 180 flights a week through Siberian airspace but declined further comment, as did British Airways.

The EU has widened its sanctions after last month's downing of a Malaysian airliner over territory in eastern Ukraine controlled by pro-Moscow rebels, with the loss of 298 lives.

Miserable summer

The suspension of the airline flying to Crimea prevented Russians from taking cheap holidays on the Black Sea peninsula at resorts such as Yalta. This has added to a miserable summer during which a series of Russian travel companies have gone under as the economy flirts with recession and the ruble falls.

Itar-Tass reported on Tuesday that the IntAer travel operator had become the latest to fold, stranding about 500 holidaymakers abroad. The company blamed "a sharp fall in demand and purchasing power and the rise in the exchange rates of foreign currencies and the negative political situation".

Russians have been increasingly taking holidays in countries such as Greece, Croatia, Bulgaria, Turkey and Egypt. However, the ruble has fallen 9 percent this year against the dollar due to the slowing economy and the effects of the crisis in relations with the West, forcing up the cost of foreign trips.

Read MoreNew sanctions for Russia—here's where they'll hurt

Around 15,000 tourists are stuck abroad following the collapse of the larger Labirint holiday firm, although industry officials have promised customers will be compensated from insurance policies which the companies had to take out.

A Greek tourism official said the country expected 1.1 million Russian tourists this year, down from 1.35 million in 2013. Arrivals from Ukraine, where government forces are battling the rebels in the east, are down 50 percent.

Andreas Andreadis, who heads the Association of Greek Tourism Enterprises, expected this would cost the country 300 million euros ($400 million). Greece still aimed to boost numbers of Russian visitors to 2.5 million a year by 2021, he said, but added "Things look like they will be getting worse before they get better."

While the mass travel market suffers, sanctions imposed by the United States have targeted individuals close to Russian President Vladimir Putin.

Read MoreWhy an aggressive Russia scares markets most

Billionaire Gennady Timchenko said U.S. company Gulfstream had stopped servicing his private plane. "Gulfstream has ceased to fulfil its contractual obligations, grounding my jet which had been purchased from it for a lot of money," he told ITAR-TASS news agency in an interview.

Gulf stream had been banned from any contact with Timchenko, he said, and could no longer supply spare parts. Pilots had also been banned from using the jet's navigation system.

However, Timchenko said Russia's business elite would not put pressure on Putin to change tack on Ukraine due to the sanctions which would only strengthen support for his policies.

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