Date of publication: 2 April 2024
Sergey Nedelko, Attorney at Law, Counsel, Head of Odesa Office
Source: Client’s Choice 2023: TOP-100 Lawyers of Ukraine
The government and businesses have devoted significant effort to restoring and maximizing our state’s export capacity since the full-scale invasion began.
Water transportation prospects are currently dependent on three components: the stable operation and expansion of the Ukrainian corridor and Danube cluster ports, the involvement of new cargo flows, and the creation of legal conditions. As we look ahead to the year 2024, let’s examine some of the most important aspects that may affect maritime business and maritime law.
Ukrainian corridor – how does it work?
It is impossible to start trends overview not mentioning the work of the Ukrainian Corridor, which is also called perhaps the greatest achievement of the maritime industry since the full-scale invasion. As you know, on 17 July 2023, Russia finally withdrew from the Black Sea Grain Initiative, after which, on 8 August 2023 Ukraine announced new temporary routes for the movement of civilian vessels to/from Great Odesa seaports – Chornomorsk, Odesa, Pivdennyi. Since 10 August, coastal warning No. 122/23 dated 9 August 2023, has been in effect, which determines the routes of vessel movement.
The stable operation of the Ukrainian Corridor is ensured by the Ukrainian Naval Forces, the State Border Guard Service of Ukraine, the Maritime Search and Rescue Service as well as the Ukrainian Sea Ports Authority (USPA). It is the USPA that coordinates all ship entries in accordance with a special procedure, as well as the Compulsory Regulations and Guide to Port Entry for the corresponding port. The corridor cannot be used by Russian-flagged vessels and those associated with Russian individuals and legal entities, or vessels owned by sanctioned persons, as well as violating vessels. The movement of vessels is carried out exclusively in a caravan upon the preliminary application of the maritime agent and in accordance with the caravan formation plan for the corresponding day. An inspection of ships heading to Ukrainian ports is mandatory.
It is also mandatory that the ship master signs a warranty letter addressed to the USPA, whereby the shipowner confirms the absence of claims against the coastal State of Ukraine in the event of a maritime incident. This is due to the provisions of international conventions, primarily the UN Convention on the Law of the Sea, 1982 and the International Convention for the Safety of Life at Sea, 1974, that impose obligations on the coastal state to ensure the safety of navigation.
Since August 2023, more than 900 vessels have passed through the Ukrainian corridor and over 33 million tons of cargo have been exported. The maritime business expects that in 2024 the Ukrainian Corridor will operate stably and comprehensively cover container shipping.
Insurance & compensation
The Lloyd’s Market Association has included Ukrainian territorial waters in the list of dangerous areas for shipping (JWC Listed Areas), therefore, for shipowners heading to Ukrainian ports, the issue of insurance against war risks and providing guarantees for potential damage compensation is critical.
By Resolution No. 548 dated 26 May 2023, the Cabinet of Ministers approved the Procedure for Providing Guarantees of Compensation for Damage Caused to Shipowners due to Military Actions on the Territory of Ukraine (Procedure). The document provides for the right of shipowners to receive compensation from the state for damage caused to a vessel in the territorial sea of Ukraine that transports non-military cargo from/to open Ukrainian ports. The main conditions for compensation are the absence of ties with the Russian Federation, the presence of compulsory insurance policies (Protection & Indemnity (P&I) and Hull & Machinery (H&M)) and the insurer’s refusal to pay compensation.
The Procedure establishes a mechanism for compensation of damage only in 2023, therefore, on 22 November 2023, the Ministry of Infrastructure published draft amendments that abolish the limitation of its validity period, reduce the amount of compensation from the budget from UAH 20 to 2 billion for 2024, and introduce amendments to the preparation of a set of documents. On 29 March 2024 the Cabinet of Ministers adopted the Resolution No. 361 whereby the similar Procedure was approved but for 2024. The maritime business hopes that the adoption of the new Procedure together with other measures will have a positive impact on ship entries to our ports.
War risks are not covered by standard P&I and H&M insurance policies, therefore, when planning a ship entry to a Ukrainian port, the shipowner must purchase an additional Extra War Risk Insurance (EWRI) policy in case of damage or loss of the ship. Following Russia’s withdrawal from the Grain Initiative, the market expected an increase in the additional insurance premium rates to 5% of the vessel’s value, which almost completely eliminated the economic feasibility of the voyage.
However, in November 2023, the Ukrainian government, together with the British reinsurers Marsh McLennan and underwriters Lloyd’s of London, managed to implement a special public legal mechanism for insuring ships against war risks, the Unity Facility. The total amount of coverage under the P&I and H&M policies is USD 50 million and allows to set the EWRI rate at an acceptable level of 1.25%. The Ukrainian Ukreximbank and Ukrgasbank participate in the program, providing stand-by letters of credit (bank guarantees), which are confirmed by the German DZ Bank. From 1 March 2024, the Unity Facility program takes effect for ships with non-grain cargo, which opens up opportunities for the long-awaited restoration of container traffic to Great Odesa ports.
The perennial issue of port dues rates
As we know, port dues for ship entries to Ukrainian ports are the highest in the Black Sea region and among the highest in the world, which directly affects the attractiveness of our ports for cargo owners, as well as the competitiveness of our export products in foreign markets. It is these issues that become particularly important in the conditions of a full-scale war and the associated additional logistics costs.
On 6 February 2024, the Ministry of Infrastructure published a draft order On Some Issues of Port Dues and Invalidation of the Order of the Ministry of Infrastructure of Ukraine No. 316 dated 27 May 2013. The draft order provides for the approval of the Methodology for Calculating the Port Dues Rates Collected in Seaports (Methodology), and the Procedure for collection, accounting and use of funds from port dues, except for the use of funds from the administrative dues. The approval of the Methodology is provided for in Article 22 of the Law on the Sea Ports of Ukraine, which entered into force on 13 June 2013, but since then the Methodology has not been approved, despite numerous business initiatives and unsuccessful attempts by the Ministry of Infrastructure.
The Ministry’s latest attempt to resolve this issue is generally perceived positively by business, but its implementation is highly doubtful, since the draft Methodology does not meet the key principles of economic feasibility, transparency and targeted use of port dues. The last principle is clearly enshrined in Article 4 of the Law on Sea Ports and is aimed at maintaining and modernizing port infrastructure facilities. However, the Methodology actually establishes the current practice, according to which port fees are a source of funding for the USPA, an object of taxation and payment of dividends to the State Budget by the USPA. In addition, business constantly emphasizes the need to carry out model calculations of ship entries by type of vessel, so that the expected effect can be estimated. We hope that the Ministry will finally pay attention to the opinion of business on such an important issue.
Construction on water fund lands
The development of the port infrastructure is inextricably linked with the construction of the water fund on the lands, which requires legislative regulation. This involves the construction of new hydraulic facilities, which would make it possible to modernize the existing infrastructure and expand the port capacity, which is especially important for the ports of the Danube cluster, which show high growth rates and are a very promising area.
Currently, two draft laws No. 9664 and No. 9664-1 on amendments to some legal acts of Ukraine regarding construction on lands occupied by inland waterways of public use, in particular, seaport water areas, are registered in the Parliament. The Law should simplify the procedure for providing land plots of the water fund for the construction of port infrastructure, eliminate conflicts in planning the development of seaports and improve legislation in the construction sector. One of the most controversial issues in draft law No. 9664 is the mechanism for the transfer of state lands under the water areas of ports, which provides for the acquisition of land for permanent use by the USPA, which, in turn, will enter into servitude agreements with the investor.
