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Black Sea and Danube Alternatives: Under What Conditions Do They Make Up for the Polish Border Blockade

Date of publication: 7 March 2024

Sergey Nedelko, Attorney at Law, Counsel, Head of Odesa Office

Source: European Pravda

The current situation on the Polish-Ukrainian border forces the Ukrainian government and business to seriously think about finding alternative logistics routes for exporting domestic products.

Since in the conditions of the large-scale war, Ukraine’s export-oriented economy cannot depend on political processes and election games in neighboring countries whose behavior does not fully meet the principles of consistency, predictability and good neighborliness.

Recent course of events at the border suggests that the Polish government is no longer able to control the situation and actually does not intend to do this pending local elections which will be held in April. But it is quite possible that Warsaw will be unwilling to solve the problem on the border with Ukraine even after the conclusion of the electoral cycle.

Under such circumstances, the best alternative is transportation through Ukrainian sea and river ports. This procedure remains good even despite the closure of the ports of Berdiansk, Mariupol, Skadovsk and Kherson, as well as the suspension of navigation to the ports of the Mykolaiv Region.

But is the Ukrainian government taking all possible measures to create new logistics routes through sea and river ports and to make these routes reliable for business as well?

Ukrainian Corridor

Considering the final withdrawal of the Russian Federation from the Black Sea Grain Initiative, Ukraine quickly managed to find a formula for stable and safe navigation to the ports of Great Odesa, as far as possible during the war.

There is no doubt that the Ukrainian Naval Forces (Ukrainian Navy) play an integral role in this process, which, together with the State Border Guard Service of Ukraine, the Maritime Search and Rescue Service and the Ukrainian Sea Ports Authority (USPA), implement the procedure for accessing these ports through the area of the northwestern part of the Black Sea under the conditions of martial law, which is also called the Ukrainian corridor.

The USPA took over the coordination of the Corridor’s operation as well as communication between shipowners (maritime agents) and other participants.

The Ukrainian corridor operates only for merchant ships of civilian shipowners.

However, it does not provide for any restrictions on types of cargo, except for military ones.

It is also prohibited for the offending vessels, Russian-flagged vessels and those associated with natural and legal entities from the Russian Federation or those owned by sanctioned persons to enter the seaports of Ukraine.

As for offending vessels, the most common violations currently are deviation from the planned route and failure to comply with speed limits.

It is possible to use the Ukrainian corridor provided that the vessel is included in the convoy at the request of the vessel’s agent in the port and in accordance with the convoy formation plan for the relevant day, agreed upon by the Ukrainian Navy.

It is mandatory to submit a letter of warranty to the USPA, according to which the master, acting as an authorized representative of the shipowner, confirms that he assumes full responsibility for the safety of the ship and crew. This means that the master understands and is aware of military risks and does not hold the coastal state of Ukraine responsible for possible incidents. At the same time, it is the aggressor country must bear responsibility for violating the laws and customs of war (Article 438 of the Criminal Code of Ukraine). Vessels heading to the seaports of Ukraine are subject to mandatory inspection to ensure the absence of prohibited (military) cargo on board.

During the period of its operation, the Ukrainian corridor has shown its extraordinary efficiency.

According to the latest data from the Ministry of Infrastructure of Ukraine, since the beginning of its operation in August 2023, more than 894 vessels used the Corridor, exporting almost 27 million tons of cargo, including about 19 million tons of Ukrainian agricultural products.

Danube Cluster Ports

Since the beginning of the full-scale invasion, cargo transshipment volumes in the ports of Izmail, Reni and Ust-Danube has increased by 2, 6, and 12 times, respectively.

Despite the effective operation of the Ukrainian corridor, the development of the Danube cluster ports has been and remains one of the priority development areas.

Thus, in 2023, 23 cargo transshipment points were opened and during 2022-2023, the USPA carried out operational dredging in the amount of 3.33 million cubic meters.

In addition, the Ministry of Infrastructure of Ukraine plans to build new routes to European ports on the Danube, which will help minimize cargo traffic across our western land borders.

The Ukrainian Danube Shipping Company (UDP), a state-owned shipping company that carries out sea and river transportation, is actively working to ensure uninterrupted exports.

The main range of cargo to be transported by river transport is iron ore raw materials, coal and coke, grain cargo, metals, fertilizers, oil products, cargoes in containers, machinery and equipment, oversize and heavy cargo.

Currently, the UDP offers delivery of containers to the Danube ports of Bulgaria, Serbia, Hungary, Slovakia, Austria, Germany and Romania.

The shipping company is actively engaged in the modernization and construction of tugs and barges fleet.

Since the beginning of the blockade of the Polish border, the UDP has developed three lines for barge convoys on the routes Ukraine – Galati, Romania, Ukraine – Regensburg, Germany and Ukraine – Constanta, Romania.

Needless to say, for certain groups of goods, river transportation cannot fully replace road and railway transport, but it should be noted that a shipload is an alternative to 2-5 thousand trucks.

Shipping Promotion

Security guarantees, indemnification and economic feasibility are the three main factors on which the maritime business is based in conditions of war.

If the implementation of the first issue is relatively clear thanks to our defenders in the Ukrainian Navy, then the other two require ongoing search and improvement of new procedures by the government.

Thus, within the framework of preparations for the launch of the Ukrainian corridor, by the Resolution of the Cabinet of Ministers of Ukraine dated 26 May 2023 No. 548, the Procedure for Providing Guarantees of Compensation for Damage Suffered by Charterers, Operators and/or Owners of Sea and Inland Waterway Vessels Sailing under the Flag of Ukraine and under the Flags of Foreign Countries as a Result of the Armed Aggression of the Russian Federation against Ukraine and Military Actions on the Territory of Ukraine (Procedure) was approved.

The document provided for compensation from the state budget for damage in the amount of up to UAH 20 billion caused in the territorial sea of Ukraine during the transportation of non-military cargo from/to open Ukrainian ports.

The main conditions for compensation were the absence of ties with the Russian Federation, the possession of only compulsory insurance policies (Hull & Machinery and Protection & Indemnity) and the insurer’s refusal to pay compensation.

However, the compensation procedure covered only the 2023 budget year and provided for the submission of a set of documents until 1 December 2023.

The budget for 2024 includes UAH 2 billion for compensation for the damage caused to shipowners and charterers as a result of the armed aggression of the Russian Federation, but the procedure for its payment does not actually apply.

Since the end of November 2023, the Cabinet of Ministers has been discussing draft amendments to the Procedure, which provides for, inter alia, lifting restrictions on the validity period of the procedure, the opportunity to receive compensation in the next budget year, etc.

VYSSOS vessel owners became victims of such legal uncertainty.

This vessel was blown up by a mine on 27 December 2023 and subsequently it was towed to the nearest port of Izmail but suffered a complete loss. However, the shipowner cannot receive the promised compensation and reimbursement of the salvage operation cost.

Another way to reduce the cost of ship entries to our ports is the Unity Facility, a special public procedure for insuring ships against war risks, implemented by the Ukrainian government in cooperation with British reinsurers Marsh McLennan and underwriters Lloyd’s of London.

The program provides for a total coverage under the Hull & Machinery and Protection & Indemnity war risk insurance in the amount of $50 million. State-owned Ukreximbank and Ukrgasbank provide standby letters of credit (actually bank guarantees), each of which must be confirmed by DZ Bank, which belongs to Germany’s second largest banking group.

It is expected that the Unity Facility will reduce the cost of grain insurance by approximately 2.5 percentage points and set the war risk insurance rate at a level of no more than 1.25% of the insured value of the vessel. Starting from 1 March 2024, the insurance mechanism has been expanded to cover vessels carrying not only grain, but also any other cargo.

At the same time, the business expects that the state will continue its work towards increasing the logistical attractiveness of the Danube ports, in particular by introducing discounts on port dues, revising the tariffs for railway transportation to the port of Izmail, and creating alternative railway routes through the territory of Moldova.

It is extremely important for the entire port industry to resolve the “perennial” issues of developing a fair and economically justified methodology for calculating port dues rates, as well as the adoption of a Law on Construction on the Water Fund Lands.