Date of publication: 29 July 2024
Sergey Nedelko, Attorney at Law, Counsel, Head of Odesa Office
Source: Ukrainian Law Firms 2023-2024
As of 15 February 2022, the Lloyd’s Market Association added Ukrainian territorial waters to its Hull War, Piracy, Terrorism and Related Perils Listed Areas. Since 24 February 2022, 17 vessels have been damaged by shelling and mine explosions, including 6 vessels in Ukrainian open seaports. Ukraine’s export potential directly depends on ensuring safe navigation in the region, ensuring the availability of war risk insurance on reasonable terms, and providing government guarantees to shipowners.
Ukrainian Corridor Navigation Procedures
It was announced on 8 August 2023 that a temporary route for civilian vessels to/from Great Odesa (Chornomorsk, Odesa, Pivdennyi) has been established, and on 16 August 2023 the container ship JOSEPH SCHULTE, operated by MSC, the world’s largest container line, departed from Odesa. The corridor has demonstrated extremely high efficiency since it was launched, exporting more than 40 million tons of cargo, including 26 million tons of agricultural products (as of April 2024). Over 1,300 vessels have sailed through the Ukrainian Corridor, and the number is increasing with every passing day.
Only merchant vessels of civilian shipowners that are not associated with Russian individuals or legal entities and which are not sanctioned in Ukraine can use the Ukrainian Corridor. Russian-flagged and offending vessels are prohibited from using the Corridor. In contrast to the Black Sea Grain Initiative (BSGI), a significant advantage of the Ukrainian Corridor is that there are no restrictions on cargo allowed for transportation, except for military ones. Each vessel is subject to a mandatory inspection in order to ensure the absence of prohibited cargo.
All vessels shall sail through the Ukrainian Corridor in a caravan following the daily plan for its formation, approved by the Ukrainian Navy and in accordance with the special procedure, Mandatory Regulations and the Code of Practice for the respective port. During operation of the Corridor, the most common violations relate to vessels not complying with the previously announced speed limits and deviating from the designated route. The Ukrainian Sea Ports Authority (USPA), together with the Armed Forces of Ukraine, comply lists of offending vessels and notify shipping agents as well as port operators mostly as a preventive measure. The Ukrainian Navy reserves the right to exclude offending vessels from the caravan, though we are not aware of such cases.
There are two routes for ships, depending on their draft. The first route lies within a 22-kilometre zone from the Ukrainian coast and can be used by shallow-draft vessels, while the second one does not have such restrictions. Upon leaving Ukrainian ports, vessels shall sail south of Zmiinyi Island and then into the waters of Romania, Bulgaria and Turkey.
In order to use the Ukraine Corridor, the shipping agent submits an application for inclusion in the caravan along with a warranty letter, signed by the master on behalf of the shipowner to the USPA, whereby the master takes full responsibility for the safety of the vessel/crew and the shipowner waives claims against the coastal State of Ukraine in the event of a maritime incident. The issue here is that of international maritime conventions regulating navigation safety issues.
War Risk Insurance
If an incident occurs in JWC’s Listed Areas, Protection & Indemnity (P&I) and Hull & Machinery (H&M), standard insurance policies will not cover war risks. Therefore, when planning a voyage to Ukrainian ports, the shipowner shall get Additional War Risk Insurance (AWRI) to cover the relevant risks. The standard term of AWRI is 7 days (pro rata), while the insurance rates depend on the specific security situation in the region and can range from 0.5-0.75% to 3-5% of the insured value of the vessel in question.
In November 2023, the Ukrainian Government, Marsh McLennan and Lloyd’s of London, British reinsurers and underwriters, used joint efforts to launch a public-private mechanism for insuring ships against war risks, known as the Unity Facility.
Under the programme, Ukraine’s state-owned Ukreximbank and Ukrgasbank banks provide standby letters of credit (bank guarantees), and Germany’s DZ Bank confirms them. The mechanism provides coverage under P&I and H&M policies to a total amount of USD 50 million. It was expected that the Unity Facility would help to set the AWRI rate at 1.25%, but the result exceeded expectations. The premium rate fell from the expected 3-5%, which basically eliminated the economic feasibility of the voyage to a quite acceptable rate of 0.75%.
Initially, only vessels carrying agricultural products could enter the Unity Facility, but since 1 March 2024, the programme has been extended to vessels carrying non-grain cargo. This also made it possible to resume container shipping to Ukrainian ports. On 21 April 2024, for the first time since the beginning of the full-scale invasion, m/v PROS HOPE, a container ship, entered a Ukrainian port (Chornomorsk).
Indemnification by Ukrainian Government
Since the beginning of 2023, Russia has started outright blocking and sabotage of the BSGI, forcing the Ukrainian Government to develop a plan B in the event that the aggressor pulls out of the deal. The main goal was to encourage shipowners to continue to enter Ukrainian ports and reassure the shipping market by providing state indemnities to shipowners, regardless of whether the vessel was covered by the AWRI policy.
For this purpose, in 2023 the Government allocated UAH 20 billion from the state budget and approved the Procedure for Providing Guarantees of Compensation for Damage Caused as a Result of the Armed Aggression of the Russian Federation against Ukraine and Military Actions on the Territory of Ukraine to Charterers, Operators and/or Owners of Seagoing and Inland Navigation Vessels Sailing under the Ukrainian Flag and Foreign States Flags (by Resolution No. 548 dated 26.05.2023).
On 29 March 2024 the Government adopted Resolution No. 361, which approved a similar Procedure for 2024 (Procedure), providing a UAH 2 billion maximum compensation amount which, however, is available within the balance. The main innovations of the new Procedure relate to the requirement of filing a compensation request supported with other documents with the Ministry of Infrastructure within 90 calendar days from the date of an incident, instead of date when the insurer denied to settle indemnity, as the previous act prescribed. In addition, it is no longer required to obtain such refusal, while the shipowner has to provide only a copy of the insurance contract or P&I policy.
The entitlement to damage compensation is provided under the following conditions: the damage is caused in the Ukrainian territorial waters during the carriage of non-military cargo to/from open Ukrainian ports, the shipowner has no connections with Russia and Belarus and was not sanctioned by the National Security Council, lack of AWRI coverage or its exemption from JWC Listed Areas.
The Government procedure covers the following damages: loss or constructive damage to the vessel, costs of repairing vessel’s constructive damage and rescue operations, loss of/damage to cargo, ship collision, wreck removal and marking the place of incident, environmental pollution including fines, personal injury to passengers/crew members and repatriation costs.
In order to claim damage compensation, the shipowner shall submit a free-form application letter disclosing the details of the incident that resulted in damages, a certified copy of the insurance contract or P&I policy, and an independent evaluation report of damage or proof of actual costs to the Ministry of Infrastructure. The evaluation report shall be prepared by a Ukrainian independent appraiser at the shipowner’s request and shall also be reviewed by the State Property Fund of Ukraine.
The main new act does not specify the timeframe for consideration of documents by the Ministry of Infrastructure and does not provide for the option to return documents for completion (revision)/correction of deficiencies.
By way of summary, we should note that Ukraine’s maritime logistics are gradually recovering. It is expected that, thanks to the joint efforts of the Ukrainian Armed Forces, the Government and foreign partners, it will soon be possible to attain pre-war transshipment volumes through seaports, which are still pivotal for the export of Ukrainian products.
