State Aid in Ukraine: New Opportunities and Old Regulations

State aid regulations and practices in Ukraine have rarely been among top news even if we talk about legal news in Ukraine for the last couple of years. However, there are some reasons for a breakthrough which may happen in the Ukrainian state aid control system. Several pending cases may lead to more complaints from market players. Moreover, the COVID-19 outbreak and its impact on the Ukrainian economy leaves no opportunity for the Ukrainian state authorities to abandon much needed state aid to many industries.

Heading to Europe

Ukrainian Law On State Aid to Undertakings, which became effective on 2 August 2017 at least initially thrilled the minds of those who were a bit familiar with what state aid is in the EU. However, the relaxed pace at which the state aid sphere develops in Ukraine may discourage supporters who contribute to the building of the state aid system in Ukraine.

Nevertheless, the history showed us multiple times that people, including Ukrainians, always give up too early to witness any results of positive initiatives. Rome wasn’t built in a day and the same may be claimed about the full-scale launch and development of the state aid control system in the EU.

It would be rather good to abstract oneself from widespread pessimistic views on the situation with development of the Ukrainian state aid control system and evaluate the current state of affairs in Ukraine bearing in mind the fact that historically the development of state aid in the EU was neither a short nor a bitten path.

In the Beginning was the Law

When we speak about the development of the state aid control system, we should not forget about the legal acts which form the basis for such development.

Nevertheless, one cannot deny that the legislative basis is mostly in place. There is still a number of state aid compatibility criteria which were developed but not yet approved by the government. Those are criteria applicable to environmental protection, banking, coal industry and the general state aid compatibility criteria. Moreover, the need to modify the regulations which are already in place will most likely be constant due to the anticipated increase in enforcement of the relevant rules, which means that the effective rules will be tested, and certain “bugs” will obviously come out. This is a natural process: it is next to impossible to hit all targets in one shot.

Also, while the rather successful EU experience in the field of state aid serves as a lighthouse for the Ukrainian competition authority, a proper path to full-scale functioning of the state aid control system should be chosen with consideration of the actual state of affairs in Ukraine. For example, it did not take long before everyone understood that the absence of any sanctions for aid grantors and lack of diligent control is definitely not the best formula to succeed in the effective launch and promotion of state aid initiatives in Ukraine.

Bringing current regulations in a proper order requires both the parliament and government to act in legislative capacity, and the Antimonopoly Committee of Ukraine to be more actively involved in enforcement of the already developed rules. One may note that the predicted 2020 competition legislation reform does not devote enough attention to state aid-related issues. Let’s hope that this will not be a systematic approach and that the leftover principle will not be applied to state aid.

State Aid in Ukraine: No Longer a Joke

The pioneering Ukrposhta case, which was triggered by a complaint from Nova Poshta, did not shed much light on the approach which may be further steadily applied by the Committee to such high-profile cases. While taking care of numerous notifications made by local authorities, which, in many cases concerned things that were certainly far from what state aid is, the Committee did not take into account that a couple of high-profile and illustrative cases could have stress-tested the Committee’s internal resources and might have resulted in sending a clear message to the market: state aid in Ukraine is not a joke.

The course of state aid reform seemed to be deferred after the 2019 changes in the composition of the Antimonopoly Committee of Ukraine. While a number of state commissionaires and other personnel left the office and new people came, it turned out that no state commissionaire is now in charge of state aid. Nevertheless, as of now, the statistics even show a slight progress in the quantitive efficiency of the Committee in 2019 compared to 2018: 12 decisions on non-compatibility (2 in 2018), 75 decisions on compatibility of state aid (9 in 2018), and 269 decisions on defining that support is not state aid (174 in 2018).

Fortunately, the appearance of a couple of recent state aid court cases and even a new third-party state aid complaint revives the expectations.

Let’s have a brief look at the mentioned recent state aid court cases (there are at least three of them). First, let’s have a look at the case on state aid granted by the Construction and Housing Department of the Kyiv City Council to several communal enterprises. The mentioned case may be of special interest due to being the first case when a court turned down the Committee’s decision on state aid. The Committee ruled that certain aid granted to several communal enterprises was incompatible and subject to recovery from such enterprises. Such decision was further appealed to the court by the Department. The court of first instance examined the evidentiary basis used by the Committee to adopt its decision and accepted plaintiffs’ arguments on services of general economic interest and Altmark criteria. The appeal court further upheld the decision of the court of first instance. The case is now pending in the cassation court.

Certainly, it is not enough for an in-depth analysis to simply review the court decision as shown in the public registry. However, we can already make one positive statement: the court is ready to look into the details of state aid cases, review complaints brought by the involved parties and render decisions in favor of the involved parties and not only in favor of the Committee.

Although the other two out of three court decisions confirmed the correctness of the Committee state aid assessments, such decisions mostly support the above statement and prove that the court is ready to look into the details. Of course, there may be certain ambiguities in such decisions which are detrimental in terms of the essence of the cases. However, we have to consider that the Ukrainian court system is generally imperfect. If the courts decided not to review the Committee’s decisions in their essence, leaving it up to the Committee to decide everything on merits and taking care only about the procedural aspects, a worst-case scenario would have taken place.

New Cases — New Opportunities?

Now we come to the cherry on top of the recent Ukrainian state aid news. On 2 January 2020, the Committee started state aid case involving Philip Morris (as an alleged recipient of state aid). The proceedings had been triggered by a complaint on unlawful state aid filed by Vynnyky Tobacco Factory – a local competitor of Philip Morris. This time, unlike in the case with Ukrposhta, where the aid in question already existed before adoption of the relevant legislation which initially determined the slow pace of case review, nothing prevented the Committee from formally starting the case and assessing the allegedly unlawful or even incompatible state aid.

The same as in the case with the above-mentioned court decisions, the Philip Morris state aid case causes serious deliberations. This is due to the background of the case, which is as follows.

Philip Morris was using an inward processing regime (under a permit from the tax authority) to import raw materials free from import duties and taxes for production of cigarettes which were further re-exported outside of Ukraine. However, in 2016, the tax authority claimed that Philip Morris misused the regime and charged import duties and taxes, as well as additional sanctions, amounting up to EUR 23 million. Philip Morris first tried to protect its rights in Ukrainian courts. At the appeal stage, the company, as an investor, involved remedies provided by the US-Ukraine and Swiss-Ukraine bilateral investment treaties and started negotiations with the State of Ukraine. In 2019 the Cabinet of Ministers of Ukraine and Phillip Morris entered into a settlement agreement based on which the tax authority revoked its claims and the court case was closed at the appeal stage. However, it turned out that the happy end of the story was not that near. As we mentioned, Vynnyky Tobacco Factory decided to file a complaint with the Antimonopoly Committee of Ukraine.

Although the fact that the Committee opened proceedings in a situation, where the matter under question was settled amicably at the level of the State of Ukraine and under the international obligations of Ukraine, leaves significant space for discussion, we will avoid assessing the reasonability and legality of Committee’s actions from the international law perspective and will refer solely to some of the state aid-related aspects.

Thus, the Committee received a third-party complaint, made a basic review, found grounds for more detailed review and opened the proceedings. This way the Committee started probably the most intriguing state aid case this far. Disregarding the potential outcome of the Philip Morris state aid case, it has a chance to become a breaking point in terms of the Ukrainian state aid control system. This may happen because even one high-profile case can send a strong message to the market and can cause other complainants to be more active in filing complaints, and those who actually receive or grant state aid be more active in taking care that all necessary analysis or even notifications are made in line with the law.

This puts state aid experts back to the starting point of a sprint run in terms of state aid development. New cases, especially the high-profile ones, will certainly stress test the Ukrainian state aid system, examine the Ukrainian courts’ readiness for proper judicial review and show all the existing drawbacks of regulations and practices. The courts will have no choice but to opine on links and correlations between national state aid laws and the Association Agreement, preciseness of exemptions from state aid regulations, ambiguity of state aid procedural rules and many other down-to-earth aspects of the state aid practice. The hope is still there that subsequently Ukrainian authorities will make sure that Ukrainian state aid legislation is absolutely in line with the rules provided by the Association Agreement and that procedural regulations are good and flexible enough to be used for effective state aid control and enforcement.