War damages to ports and railways are reimbursed by the state

The Ministry of Infrastructure has published a draft order approving the Procedure for assessing damage caused by Russia to Ukrainian ports in the Danube region.

Who can count on reimbursement?

The project was developed in order for charterers, operators and/or owners of vessels (sea or inland navigation) to receive the possibility of compensation for damages. We are talking about ships that were in the water area of ​​Ukrainian ports in the Dunai region.

The project also applies to owners and/or operators of railway rolling stock admitted to circulation on the 1435-millimetre track, if such rolling stock is located on the territory of Ukraine.

It is also important to clarify that the assessment procedure concerns damage caused as a result of the armed aggression of the Russian Federation against Ukraine and military actions on the territory of Ukraine, in the event that insurers refuse to provide insurance coverage for such risks.

Why is the state compensating for damages, and not the insurance company?

According to established practice, the standard exclusions from the insurance cover include insured events that occurred during an emergency, special or war declared by the authorities in the country or in the territory of the Insurance Contract.

Thus, with the introduction of martial law in Ukraine on February 24, a situation arose in which – due to the impossibility of providing guarantees from insurers – a complete stoppage of the work of the ports of Ukraine in the Dunai region and railway transportation of rolling stock becomes possible.

Dunai ports and railways are critical logistical links

In the current conditions, there is a possibility of full operation of only three Ukrainian seaports: Reni, Izmail, Ust-Dunaysk, whose role is gaining priority and to which, as far as capacity allows, the cargo flow from other ports of Ukraine is redirected.

The Odesa railway, including the railways of the Dunai region, is an important component of the single transport conveyor of the south-western part of Ukraine, which accounts for almost 20% of the freight turnover of the country’s railways. There are also large seaports in the Odesa railway region. Thus, the railways of the region provide external transport and economic connections with more than 70 countries of the world.

In view of this, it is quite obvious that guaranteeing the safety of charterers, operators and/or owners of ships in the conditions of martial law is a priority task for the state in order to ensure at least partial preservation of the country’s export capacity.

In order to stabilize the situation of transportation using Ukrainian ports of the Dunai region and rolling stock, it is necessary to ensure the allocation of funds from the reserve fund of the state budget to compensate for losses caused as a result of the war, and, accordingly, to approve the mechanism for assessing such losses.

Procedure and cost of damages

During the past year, a total of 3,614 ship calls were made to Reniya, Izmail, and Ust-Dunai ports, which is an average of 301 ship calls per month. The cost of vessels that usually call at the specified ports is, on average, $1.5 million per unit.

Thus, the guarantee amount, which may theoretically be needed to cover cases related to the war, amounts to $451.75 million — UAH 1.32 billion. Note that MIU calculates the amount based on the exchange rate of UAH 29.25 per US dollar.

Regarding railways: last year, 18,893 wagons of various types were on the territory of Ukraine as part of export-import operations. On average, this is 1,574 wagons per month. In connection with the full-scale invasion of the Russian Federation into Ukraine, there was a need to increase the volume of such transportation through the railway international border crossings of Ukraine to Poland, Slovakia, Romania, Hungary and further to Western Europe. This will potentially increase the average monthly number of wagons on the territory of Ukraine to 3,148 units.

The cost of these wagons, on average, is 3 million UAH per unit. Thus, the guarantee amount, which may theoretically be needed to cover cases involving rolling stock of track 1435, currently amounts to UAH 4.7 billion and can potentially be doubled.

MIU expects that the implementation of the act will ensure the stabilization of the economic situation in Ukraine during the martial law, in particular the situation of transportation using Ukrainian ports on the Dunai and railways.

Why will damages be compensated to the Dunai ports and not to the sea ports?

Indeed, since the beginning of the full-scale aggression of the Russian Federation in Ukraine, there have been no recorded hits of missiles in the infrastructure of ports on the Dunai. Some ships were damaged by explosive devices – but they belong to government institutions.

The Dunai ports did not experience the financial losses associated with the war either. Moreover, before the launch of the “grain corridor”, exports from the Black Sea ports blocked by the actions of the Russian fleet were redirected to the Dunai ports.

It is likely that MIU focused on indemnifying the Dunai ports in order to consolidate cooperation with investors, in particular the European Bank for Reconstruction and Development. By having a mechanism for compensation for losses, the department demonstrates that it is possible to invest in Ukrainian ports even during war, because any damage to the infrastructure is compensated by the state, not the investor. For this reason, the Ministry of Infrastructure could focus its primary attention on the Dunai ports.

Ukraine’s seaports have suffered significant destruction and their operators/shipowners have suffered financial losses as a result of the war. So these ports will need completely different payment mechanisms and different compensation schemes. Calculations of the necessary sums are being carried out at the level of the state leadership, and friendly countries of the world have already declared their intentions to support the restoration of seaports in southern Ukraine. In addition, compensation for damages caused by Russian attacks should be fully borne by the budget of the attacker and become one of the points of future reparations.