On 24 February, the Ukrainian parliament adopted an amendment to the Law of Ukraine on the State Budget for 2023, which provides for compensating owners of ships entering Ukrainian ports if Russia damages or destroys their ships. The Ministry of Community Development, Territories, and Infrastructure drafted the amendment in cooperation with Ukrainian lawmakers and the parliament’s budget committee. "Lawmakers took an important step toward full resumption of civilian shipping in the Black Sea today. Together, we are looking for ways to ensure the operation of Ukrainian ports and expand the range of products for trade turnover," Ukraine’s Deputy Prime Minister for Reconstruction/Minister of Community Development, Territories, and Infrastructure Oleksandr Kubrakov said at the time.
Insurance of ships by the government should send a positive signal to the market and lower the cost of ship calls to Ukrainian seaports. In addition, according to Deputy Minister of Community Development, Territories, and Infrastructure Yurii Vaskov, risk compensation by Ukraine is one of the steps taken by the government to ensure the free movement of ships to Ukrainian ports and expand the range of the cargo they transport. "Restoration of free shipping is a priority. We have repeatedly appealed to the United Nations’ International Maritime Organization to act as a guarantor of Ukraine's right to free commercial shipping, to which the country is already entitled under international conventions," he said. The government of Ukraine will allocate funds for compensating for damage to ships.
The CFTS portal requested answers to five key questions regarding the new insurance mechanism.
Why is it important?
The Joint War Committee of the Lloyd's Market Association (LMA) added all the territorial and internal waters of Ukraine, as well as the entire country of Russia, to its list of areas with an elevated likelihood of war, piracy, or terrorism (JWC Listed Areas) last year.
As a result, insurance premiums for merchant ships increased 20-fold, from 0.025% to 5% of a ship’s value.
The market has somewhat stabilized since the launch of the Black Sea Grain Initiative, but any military or political complication can raise rates again or close the reinsurance market to Ukraine. This was the case in November, for example, when Russia suspended its participation in the Black Sea Grain Initiative. The London-based insurer, Lloyd's of London Ascot, said at the time that it was also suspending the provision of insurance cover for new shipments through the Black Sea grain corridor until it had more clarity about the situation there.
That is why it was necessary to find a mechanism for reinsuring war-related risks to ensure that Ukraine does not depend on external factors. In addition, it will serve as an additional argument in favor of completely lifting the blockade of Ukraine’s seaports. "I am confident that the provision of risk compensation guarantees will send a powerful signal that will stabilize the Ukrainian and global economy," Kubrakov said.
How much money will be allocated?
The total amount of compensation payable this year will be up to UAH 20 billion. The Cabinet of Ministers was granted the right to use money from the State Road Fund if an insured event occurs. "This does not mean that this money will be spent immediately. With the adoption of this amendment, we allowed the Cabinet of Ministers to spend it if necessary. The average value of the ships that entered Odesa ports under the grain agreement in 2022 was USD 13 million or somewhere around UAH 500 million," said Roksolana Pidlas, head of the Ukrainian parliament’s budget committee.
The government adopted a similar decision for the aviation industry in February 2022, when it agreed with the parliament’s budget committee to allocate UAH 16.6 billion for providing guarantees of flight safety within Ukraine to insurance companies, reinsurance companies, leasing companies, and air carriers.
To which vessels, cargoes, and ports will the mechanism apply?
The mechanism applies to all types of cargo. The guarantees apply to charterers, operators, and/or owners of vessels sailing under the flags of Ukraine and foreign countries. The guarantees extend to all Ukrainian ports and inland waters. "It is important to note that these are not guarantees. We are talking about creating a fund for compensating for important losses. The law applies to all vessels entering Ukraine’s open ports, regardless of their type of cargo," Vaskov said.
When will the compensation mechanism come into effect?
The Cabinet of Ministers will approve the procedure for paying the appropriate amounts of compensation based on a proposal from the Ministry of Community Development, Territories, and Infrastructure.
"The regulatory framework is already being drafted, and we hope it will be approved within a month," Vaskov said in comments to the CFTS on 28 March.
What will be its impact on the "grain corridor?"
The adopted amendment also applies to vessels entering Ukrainian ports under the Black Sea Grain Initiative. However, Russia has been constantly sabotaging the operation of the Black Sea “grain corridor” for the past five months by artificially reducing the number of vessel inspections. This has resulted in a shortfall of 12-15 million tons in the volume of grain exports. Therefore, Ukraine is considering the possibility of operating its ports without the "grain corridor."
"The parliament has adopted a law that provides for state compensation for losses caused by the Russian Federation’s military aggression. Therefore, we are forced to consider the option of operating without the grain initiative... For the world and us, it will be better if shipping resumes fully. This is our priority and our right as a country under international conventions. The grain initiative is a temporary measure that minimizes the war’s impact on global food security. If we see that this temporary measure is not having the desired effect, we will consider Plan B and implement it," Vaskov said.
He again emphasized that resumption of free shipping in the Black Sea is currently Ukraine’s priority. He added Ukraine has repeatedly appealed to the International Maritime Organization to act as a guarantor of Ukraine's right to free commercial shipping, to which the country is entitled under international conventions.
