bne IntelliNews -

The Russian government declared the heavily indebted Transaero Airlines bankrupt on October 1, one month after the cabinet approved the company's takeover by national flagship carrier Aeroflot.

Prime Minister Dmitry Medvedev gave the green light to begin bankruptcy proceedings at a government meeting on October 1, Russian media reported, after negotiations over the takeover by Aeroflot hit a dead end.

The bankruptcy of Transaero, which has debts of around $4bn, was regarded as the only way out of the situation after shareholders in the airline failed to transfer 75% plus one share to Aeroflot as agreed. 

Other reported reasons for the bankruptcy are the rejection by Transaero's creditors of a debt restructuring model proposed by the state-owned Sberbank, which is overseeing the deal. The Russian Ministry of Finance was also reluctant to give state guarantees of RUB 85bn ($1.3bn) for the restructuring of Transaero as agreed in the early stages of negotiations.

"The process has taken the toughest turn," TASS quoted a federal official present at the October 1 cabinet meeting as saying. "The bankruptcy will proceed according to Russian law," he added.

State-controlled Aeroflot had a 37% share of the Russian air travel market in 2013, according to its website. Together with privately-owned Transaero's 14.8%, it would now have more than a 50% market share, had the acqisition deal gone through successfully.

Sberbank was ready to initiate bankruptcy of Transaero, which owes the bank RUB6bn ($91 million) and further capital leasing arrears, a source in the bank told TASS. "We are ready for initiating bankruptcy," the source said. "The bank is not accustomed to losing money for nothing."

Russia's federal aviation service has told Transaero to stop all ticket sales, TASS reports. Meanwhile, negotiations on carriage of Transaero's passengers by aircraft of Aeroflot, S7, Ural Airlines and Taimyr have not brought results, a source close to the talks told TASS.

First Deputy Prime Minister Igor Shuvalov said the government would offer assistance to passengers who have bought tickets, as well as around 10,000 Transaero employees who now stand to lose their jobs.

Stormy skies for Russian air travel 

The Transaero bankruptcy comes a week after Ukraine banned Russian air traffic from its skies and airports under a slew of sanctions against Russia over its support for separatists fighting Ukrainian government forces in the east of the country.

The flight ban comes into effect from October 25 after Kyiv announced restrictions on more than 90 companies or groups, mostly from Russia, and including airlines Transaero and Aeroflot, which is 51% state-owned.

"Russian planes with the Russian tricolor have no business in Ukrainian airports," the government's website quoted Prime Minister Arseny Yatsenyuk as saying.

Moscow responded a few days later by also banning Ukrainian airlines from flying to Russia starting from October 25, leaving carriers scrabbling to reshuffle flight schedules.