Overview of Recent Legislative Changes in Ukrainian Aviation Industry

I. Ratification of the Cape Town Convention

On 6 June 2012 Ukrainian Parliament ratified the Convention on International Interests in Mobile Equipment and the Protocol thereto on Matters Specific to Aircraft Equipment, both dated 16 November 2001 (together the "Cape Town Convention").

The Cape Town Convention introduces internationally recognized collateral system in aviation financing that enables security interest to be created over the aircraft and related equipment, upon registration with an electronic international aircraft registry in order to guarantee the priority of creditors' claims against other parties. In this manner, the creditors are better protected against any debtor's default and insolvency risks, including ability to request removal of an aircraft from the national civil aircraft register and export it, as the existence and effectiveness of their collateral is assured by the registry system.

Consequently, entities involved in the aircraft financing will have more confidence in transactions and the resulting reduction in risk will permit discounted finance costs. Debtors are in turn protected from unwarranted seizure of the assets by creditors, provided they have properly maintained their financial obligations.

Despite its obvious advantages, the ratification of the Cape Town Convention may not have an instant tangible impact on Ukraine's aviation market as it does not apply retrospectively. In other words, the existing financing agreements would have to be amended in order to benefit from the international aircraft registry.

Ukraine has made a reservation not to apply provisions of the Cape Town Convention to the internal transactions with respect to all types of aircraft objects.

The law ratifying the Cape Town Convention must be signed by the President of Ukraine and officially published to become effective. The Cape Town Convention will enter into force in Ukraine on the first day of the month following the expiration of three months period after the date of deposit of the ratification instrument.

II. Introduction of the Interest Rebate Subsidy

On 5 June 2012 Ukrainian Parliament adopted amendments the Law of Ukraine "On Development of Aircraft Construction Industry" (the "Amendments") enhancing state support of the national aircraft manufacturers.

Pursuant to the Amendments, Ukrainian aircraft operators are entitled to receive partial reimbursement of interest payments on bank loans attracted for procurement of domestically-manufactured aircraft and spare parts. Subsidy is introduced from 1 January 2013 till 1 January 2017 under the loans extended in national currency. Interest will be refunded at the level of Ukrainian National Bank's discount rate, which is currently equal to 7.5%.

To become effective the Amendments must be signed by the President of Ukraine and officially published.

III. Deregulation of Ukrainian Aviation Industry

On 8 June 2012 amendments to the Law of Ukraine "On the List of Licensing Documents in the Commercial Activity Sphere", adopted by Ukrainian Parliament on 17 May 2012 and abolishing (a) permit for irregular international flights; (b) permit for performing aviation works by foreign operators, joint ventures and enterprises wholly owned by foreign investors; and (c) permit for conducting construction works and other activities on the aerodrome area entered into force. The amendments are apparently directed at liberalization of state control in Ukraine's aviation market.

For further information please contact senior partner Armen Khachaturyan,
associates Oleksiy Demyanenko and Yuriy Radko.

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