You're reading: Justice Ministry backs off anti-competitive air rules

Media, public and industry outrage prompted the Justice Ministry on Nov. 26 to suspend a new mechanism for distributing air routes among aviation companies that would have harmed international airlines.

The new rules, registered only on Nov. 13, would have required a carrier wanting the right to fly international routes to have the Ukrainian state or a Ukrainian citizen as its final beneficiary.

Market participants, as well as experts, unanimously denounced the new rules, prepared by the State Aviation Service, as discriminatory and anti-competitive. They alleged that the cancelled rules were created to benefit billionaire Dnipropetrovsk Governor Ihor Kolomoisky’s Ukraine International Airlines, the biggest local flights operator.

Had the rules remained in effect, air companies would have had to compete for new international routes based on a table of scores that considers the number of previous routes flown, the type of aircraft flown and taxes paid.

For an international charter route, a carrier would have had to show that it has at least one year of experience conducting international flights. Moreover, it would take up to two years to receive the right to fly internationally, while the carrier would have to make do with local flights during this waiting period.

It was former Ukraine International Airlines employee Denys Antonyuk who pushed the new rules as head of the State Aviation Service, a market regulator.

Sergiy Podgoretsky of Atlasjet Ukraine, an operator with its parent company in Turkey, during a Nov. 25 news conference said “the spinelessness and lack of professionalism of the (Infrastructure) Ministry” had allowed a lobbyist to at once chair the regulator and promote the business of his former employer.

“The corrupt practices of the previous regime have returned,” Podgoretsky added, which is why no local company besides Ukraine International Airlines have managed to secure new routes since May.

The State Aviation Service’s Antonyuk didn’t reply to a Kyiv Post request for a comment, while CEO of Ukraine International Airlines Aron Mayberg said they are against the monopolies on the market.

Moreover, the airline, through its subsidiary Interavia, controls 75 percent of the handling services in Boryspil, the country’s biggest airport located 40 kilometers from Kyiv, according to former airport director Borys Shakhsuvarov. “We are facing heavy discrimination in favor of Interavia,” said Oleksiy Palas of TransAero Handling, a partner of the Hungarian low-cost flight operator Wizz Air Ukraine.

Wizz Air went even further in their opposition to the new mechanism. They announced that they are considering leaving the Ukrainian market unless the rules are cancelled. However, on Nov. 26 they said that they are staying.

Tymofiy Mylovanov, a member of Vox Ukraine, a group of economists who provide policy advice, says the rules will likely to be changed, though maybe insignificantly, as Justice Ministry recommended to include businesses’ suggestions in a new version of the regulation.

Zoya Mylovanova, another member of Vox Ukraine, says the rules were obviously restricting free market competition and discriminating against foreign investors and smaller carriers. They definitely contradicted international investment agreements, while Ukraine aims to sign the Open Sky Agreement with the European Union, which would make air connections with the 28-nation bloc easier in terms of paperwork and licenses. Mylovanova also thinks that the appointment of Antonyuk to head the market regulator goes against the spirit, if not the letter, of the recently adopted anti-corruption laws.

Moreover, as the local aviation market is expected to shrink by as much as 35 percent this year amid war with Russia, any additional restrictions would make the market contract even more.

Will Ukraine International Airlines real owner please stand up?

It might also be treated as a company with a foreign owner.

Its tax-reducing ownership scheme involves Kyiv-registered Capital Investment Project, with 74 percent of the shares, and four offshore companies in Belize, one in British Virgin Islands and another in Cyprus, all interlinked.

Dmytro Pichugin, a lawyer with Goldblum and Partners in Kyiv, says it’s clear that the ultimate beneficiary is a Ukrainian, but the airline should be treated as a Ukrainian company with a foreign owner, which is why the new rules, when they enter into force, will hit them too. A new law obliges all business entities working in Ukraine to disclose their final beneficiaries.

Kolomoisky has never publicly confirmed that he owns the airline after the government sold it in 2011 in a move highly criticized for its lack of transparency. The company’s sale price did not exceed $38 million, though Windrose, another local company, offered more than $60 million, according to Ekonomicheskie Izvestiya, a business publication. Since the money was supposed to be paid by 2016 in hryvnia, according to the Kyiv Post sources, the government’s losses are expected to be even bigger, since the hryvnia has lost almost 50 percent of its value this year. Ukraine International Airlines says all the purchase obligations have been fulfilled.

Ukraine International Airlines reported $90 million in losses so far this year due to the ongoing crisis. On Nov. 18, the Kyiv Commercial Court ordered to block the company’s account with the bank Finansy I Kredyt and demanded UIA to pay a $340,000 debt it has with the market regulator. The company doesn’t recognize the debt, appealed the court ruling and it was cancelled, according to company’s CEO Mayberg, an Israeli citizen.

In its turn, the Kyiv Oblast Prosecutor Office has stated that Ukraine International Airline owes Boryspil Airport $9 million, but the company declined to pay it off this month.

Kyiv Post staff writer Olena Gordiienko can be reached at [email protected].