Russian Competition Law: Overview and Recent Developments

Tapani Manninen, Kseniya Sirotenko and Elena Sokolovskaya¹

Hannes Snellman

The new Russian Federal Law on the Protection of Competition (Competition Law) entered into force in October 2006, replacing two separate laws on financial and commodity markets and ensuring more efficient control by the Russian competition authorities. The Competition Law is now the primary act regulating competition in Russia. The aim of the amendment was to bring the Russian competition legislation closer to different European jurisdictions, but the objective of the amendment was not to unify the Russian competition legislation with the EU rules. Consequently, there are still important differences both in substance and regarding enforcement and sanctions.²
Not surprisingly, the main areas covered by the Competition Law are prohibition against the abuse of dominant position, the regulation of prohibited agreements and concerted practices, merger control and the prohibition of unfair competition.
As a general rule, Russian Competition Law applies to agreements restricting competition entered into outside the territory of the Russian Federation between Russian or foreign entities, provided that such agreements relate to the primary production assets or intangible assets, the shares of Russian commercial companies or rights to Russian companies. As regards merger control, concentrations involving local presence in Russia are covered by Russian competition legislation. In practice this means that, to the extent that such activities impact the Russian market, FAS jurisdiction extends to nearly all substantial offshore transactions and other foreign-to-foreign mergers that relate to Russian companies or assets.

Federal Antimonopoly Service

The competent authority in Russia is the Federal Antimonopoly Service (FAS) established in 2004 as the successor of the Russian Soviet Federative Socialist Republic (RSFSR) State Committee for Antimonopoly Policy and Support for New Economic Structures, founded in 1990. FAS, headed by Igor Artemyev, is divided into 82 territorial subdivisions throughout the Russian Federation. The cases are delegated between the central office and the territorial subdivisions, in accordance with the location and the assets of the company involved. However, the biggest merger control cases are normally dealt with by FAS central office in Moscow.

Dominant position and abuse of dominant position

The emphasis of the Russian Competition Law has traditionally been on dominance issues. The new law is aimed at strengthening control over dominant companies. FAS is expected to actively apply sanctions against companies abusing their dominant position.

Single dominance

The definition of dominant position (single dominance) in Russia is fairly similar to the EU system. A market share of 50 per cent creates a presumption of dominance, while a market share below 35 per cent forms a safe harbour where a company normally cannot occupy a dominant position.
In the landmark Evrocement case, FAS concluded that the cement producer Evrocement Group had a dominant position since its market share in June 2005 was 65 per cent whereas its closest competitor had an 8 per cent market share, and these market positions had been relatively stable. Furthermore, FAS noted that access to the market was limited due to high entry barriers, that the cement market in five federal districts had become highly concentrated and that Evrocement did not have competitors of equal strength.
Evrocement was deemed to have decisive influence on the conditions of the commodity market; subsequent to its 50-70 per cent price increase, most of Evrocement’s competitors increased their prices by 10 to 30 per cent. Soon afterwards the majority of the other cement producers increased their prices again to a level comparable with that of Evrocement. Thus Evrocement was the price leader due to its dominant position.
At the moment, there are strong political pressures to lower the dominance thresholds in certain sectors as the government is trying to keep the prices of basic groceries down. According to a recent proposal,³ the definition of dominant position should be amended with respect to companies operating on the retail trade market for foodstuffs, consumer goods and medical products. The food retailers are in the loop in other respects as well, since the competition authorities are planning to react to certain practices that they consider abusive: charging suppliers for access to retailers’ networks of stores, imposing pricing policy on suppliers, unilateral failure to fulfil contract obligations and unilateral termination of supply contracts, and making suppliers compensate for losses caused by theft in retailers’ trading outlets.

Collective dominance

The concept of collective dominance exists in Russian Competition Law, but is quite different from the EU doctrine. Indeed, in Russia, up to three companies may enjoy a collective dominant position if their combined market share exceeds 50 per cent and none of them has a market share below 8 per cent. In addition, it is required that the market shares have been stable for at least more than a year, that the entry barriers are high and that the demand is not price-elastic. Correspondingly, the top five companies with a combined market share exceeding 70 per cent may, if the above conditions are met, have a collective dominant position. As opposed to the EU law, the Russian law does not require that the companies have coordinated their actions or that there is a ‘connecting factor’ between the companies.

Abuse of dominance

As in the EU law, the Competition Law prohibits dominant companies from abusing this position in a way that could result in the prevention, restriction or elimination of competition in the relevant market. The infringements include monopolistic and predatory pricing, restricting production, imposing unfair contractual terms or the refusal to supply without economic or technical justification to do so and creating barriers to entry or exit.
However, it should be noted that behaviour that under EU law would normally be assessed under dominance rules (and be acceptable for a company with a relatively low market share) could, in Russia, fall under the rules of unfair competition or prohibited agreements.
A sector-specific legislation regulates dominance issues with regard to, for example, natural monopolies and the supply of energy resources such as gas pipelines, railways, transport terminal services, sea port and airport services, postal services, electricity transmission, etc. Special rules also apply to financial institutions.
In dominance cases, FAS may impose financial penalties of an amount equal to the income received as a result of the illegal activity. The maximum penalty, however, is capped at 2 per cent of the company’s total annual turnover. The following examples illustrate the FAS’s recent fining practice.

Potassium chloride

After having investigated price increases in the potassium chloride market, FAS concluded that a sudden 50 per cent increase constituted an abuse of a collective dominant position by two companies.
In April 2007, FAS issued a decision specifying the actions that the companies must undertake to eliminate the infringement and ordered the two companies to transfer €3.6 million and €176,000, the income obtained by violating the Competition Law, respectively, to the Federal budget. The larger of the two companies, Silvinit, agreed to cease the infringement and settle the case with FAS. In accordance with the settlement confirmed by the Moscow Arbitration Court in July 2008, it paid a sum corresponding to €950,000 to the Federal budget.

Cement

In the above Evrocement case, FAS concluded that Evrocement breached the Competition Law by setting a monopoly price for cement. FAS ordered Evrocement to put an end to the infringement and announced that it was considering a compulsory divestment of the group. Evrocement was ordered to transfer the income obtained through the violation, €54 million, to the Federal budget. In August 2006, the Moscow Arbitration Court confirmed a settlement whereby Evrocement transferred €7.6 million to the Federal budget, made a commitment to observe the Competition Law and not to abuse its dominant position.

Ethylene transportation services

The Federal Arbitration Court of the Povolzye District confirmed in July 2008 the validity of FAS decision establishing that Nizhnekamskneftekhim OJCS had fixed discriminatory rates for the services of ethylene transportation for ‘Caustic’ and ordered it to transfer the unlawful profit (approximately €2 million) to the Federal budget.

Energy

A fine of €26,000 was imposed on an energy company for cutting off the hot water supply in housing cooperatives without warning and without acceptable justification.

Agreements and concerted practices

Equivalent to article 81 EC, article 11 of the Competition Law prohibits agreements and concerted practices which may result in price fixing or market sharing.
Agreements or concerted practices that might result in imposing contractual terms that are disadvantageous or irrelevant to the subject matter are also prohibited. The law provides a long list of activities that are considered restrictive to competition and where no exceptions are accepted.
It is also worth noting that in Russia, unfair competition is covered by the Competition Law. The list of acts of unfair competition is supplemented by the Federal Law on Advertising, as the majority of unfair competition violations are committed in the advertising field. FAS has for example imposed a fine of €3,000 on a mobile phone operator for having called subscribers of competing operators and offered them mobile services.
The concept of agreement refers both to written and oral agreements and, some exceptions notwithstanding, covers vertical agreements as well.
The concept of concerted practices may also apply to price related statements made in the media. In March 2008, the director of OOO BazelCement, Dmitry Savenkov, gave an interview to the newspaper Kommersant in which he stated that he expected rising costs in the cement sector during the coming summer.
In the FAS’s opinion the pre-warning constituted a recommendation directed to other cement producers, which could be qualified as concerted practices. In a similar case in 2006 FAS had also reacted to comments made in the media by the head of the Moscow Fuel Association on the need to raise petroleum prices.

Enforcement

There are indeed clear indications of FAS getting tougher in investigating cartels. Thanks to the new Competition Law, it is in possession of better tools to wage the battle against cartels. The sanctions for Competition Law infringements are regulated in the Code of Administrative Violations amended in May 2007. Inspired by the EU legislation, the amount of fines is now linked with the company’s annual turnover.
FAS may impose an administrative fine of up to 15 per cent of the revenue accrued from the company’s sales on the market where the violation was committed. FAS representatives have recently announced that they are aiming at an average fine level of 7 to 8 per cent, which would mean a significant increase to the current practice.
In addition to the administrative sanctions, the violations of Competition Law may also result in civil liability. Consequently, FAS may order the company to transfer the profits gained in violation of the Competition Law to the Federal budget. However, in its recent resolution, SACRF has stated that the administrative fine should always be prioritised and that it is not acceptable to cumulate the sanctions by imposing both the fine and the order to transfer gains to the Federal budget.⁴
Finally, criminal liability may arise from the offences of price fixing, market sharing and restricting competitor market entrance. However, criminal liability has proved difficult to establish since it is currently linked with the harm caused to the victim. Further, the victim’s cooperation with authorities is required in order to establish criminal liability. The criminal sanctions include four to six months’ detention or imprisonment for up to two years.
The possibility of disqualifying representatives of cartelists from their managerial duties is, in practice, an efficient deterrent in cartel cases. A person banned by a court decision cannot occupy a post as an executive, a board member or a company manager during a period of up to three years.

Investigative powers

FAS’s powers to search for evidence on cartels have been limited compared to those of the EU authorities. However, there have been changes in this respect as well. FAS and the Ministry of Internal Affairs have launched cooperation strategies aimed at disclosing price cartels. In practice this means that cartel investigations may be based not only on documents and complaints but also on recordings of telephone conversations and e-mails. It is also noteworthy that according to a recent resolution of the SACRF, it is no longer necessary for FAS to provide documentary evidence on a cartel. Simultaneous actions by competing companies (eg, price increases) taking place on the market in a uniform manner and without objective justification may constitute sufficient proof of concerted practices. As written evidence on cartels is notoriously hard to come by, the statement of SACRF is of capital importance to FAS.

Case law

There are clearly fewer FAS cases on cartels than on the abuse of dominance. In 2006, FAS declared that Heineken’s distribution agreements, which included a provision stipulating that every authorised distributor had a limited territory in which to sell the company’s goods, infringed the Competition Law. FAS required Heineken to remove the said restrictions from the agreements.
In a more recent case decided in July 2008, FAS concluded that Unimilk had shared the markets and fixed prices when setting the resale prices for its distributors. Unimilk was given a fine of approximately €430,000, corresponding to 7.5 per cent of its turnover in the market for milk supply.
At the moment, there are several cases pending where FAS or its local offices have initiated administrative proceedings against oil companies accused of price collusion. Other targeted sectors include banking and insurance.

Leniency

In 2007 Russia introduced a leniency programme, entailing immunity from fines for both companies and private persons under conditions similar to the Commission regime. As the implementation guidelines have not yet been enacted, the programme is not yet fully operational.
Nevertheless, the leniency programme has been tested in a few cases in the sectors of banking and insurance. However, these cases hardly qualify as examples of true leniency, since, for instance, in the Rosbank case all 37 insurance companies having entered into agreements restricting competition voluntarily notified FAS about withdrawing from the agreements and were exempted from fines.

Merger control⁵

In the past, Russia has been a particular challenge when it comes to multi-jurisdictional filings. It has not always been easy to determine when a transaction needs to be notified to FAS. The new Russian Competition Law introduced certain improvements, but did not completely remove all uncertainties.
The Competition Law sets out a list of transactions that fall within the merger control of FAS. The current practice of FAS, however, shows that in addition to the transactions mentioned in the list there are transactions which are not explicitly mentioned in the law, but which are nevertheless subject to filing since they have or may have an impact on competition in Russia.
Consequently, foreign-to-foreign mergers in respect of Russia-based assets or shares, for example, or participation interests of Russian companies and rights over Russian companies, are subject to filing if they have or might have an impact on competition in Russia. The interpretation of FAS has not been very consistent in recent years. More and more foreign-to-foreign mergers are subject to clearance by FAS. Transactions completed between non-residents of Russia are also subject to filing if the transaction is, for example, connected to the shares of a Russian company.
As opposed to most EU countries, filing thresholds in Russia are principally based on the assets of the acquirer’s group and the target’s group, and to a lesser extent on their turnovers. Filing is mandatory when the thresholds provided for in law are exceeded.
Prior consent from FAS in the acquisition of shares is required when the aggregate balance sheet value of the assets of the acquirer’s group and the target’s group exceeds 3 billion roubles (approximately €86 million) or when their combined turnover during the last calendar year exceeds 6 billion roubles (approximately €171 million), and the aggregate balance sheet value of the target group’s assets exceeds 150 million roubles (approximately €4.3 million).
The same thresholds apply also in mergers and consolidations. A prior consent is required when the value of the assets of the restructuring participants, including their groups, exceeds 3 billion roubles, or when their combined turnover exceeds 6 billion roubles.
Whereas the establishment of a new company was previously subject to a notification to FAS, the notification is now required only in cases where the share capital of the new company is paid for with the shares or assets of another company. The thresholds are the same as above.
Notwithstanding the aforementioned thresholds, prior consent from FAS is also required if any of the entities is included in the Russian register of business entities having a market share over 35 per cent.
If the thresholds for a preliminary notification are not met, a post-closing notification may be required. The threshold for the aggregate balance sheet value of the assets or the combined turnover of the acquirer’s group and the target’s group is 200 million roubles (approximately €5.7 million). In addition, when acquiring shares, rights or property the aggregate value of assets of the Russian target’s group of companies must exceed 30 million roubles (approximately €860,000). The post-closing notification must be filed within 45 days of completion.
A failure to submit a pre-closing or a post-closing notification⁶ is sanctioned by administrative fines. These fines are imposed regularly, although their amount is still modest.
The failure to submit notifications to FAS entails an administrative fine up to approximately €14,000. Transactions can also be considered invalid, in full or in part, by the court at the initiative of FAS, if the transaction leads or may lead to competition restrictions. This penalty is applied rarely. The closing of a transaction before clearance may result in fines and at least in principle the invalidation of the transaction.
When in doubt, the transaction should be notified to FAS as the law is not clear. Earlier omissions of filing duties may lead to difficulties in future transactions and with FAS dealings in general. For example, in a recent unpublished case, a transaction was notified to FAS which, while investigating the current transaction, found out that a previous transaction regarding the same target company had never been filed to FAS. A fine of approximately €2,700 was imposed on the company.

Case law

FAS has recently blocked several acquisitions in strategic business areas or set conditions for their approval.
In Aker Kvaerner FAS concluded that the acquisition of shares of Astrakhansky Korabel OJSC would create a dominant position for Aker Kvaerner Engineering and Technology AS and dismissed the notification. However, before that, FAS had already imposed a fine of 100,000 roubles on Aker Kvaerner for gun jumping, that is, for completing the transaction before FAS clearance. Astrakhansky Korabel OJSC was the dominant player on the market of technical means of hydrocarbons exploration and production in the Russian sector of the Caspian Sea with a market share exceeding 50 per cent.
FAS also refused to clear the acquisition of Roschino Airport OJSC by UTair Airline. FAS established that Roschino Airport was the only airport in Tuymen region in Siberia and that the competition on specific routes there was practically non-existent. UTair Airline’s share of all air traffic from Roschino Airport exceeded 60 per cent. FAS came to the conclusion that by acquiring the assets of Roschino, UTair Airline would be able to strengthen its dominant position.
In Carlsberg, FAS concluded that as a result of the acquisition of full control in local Baltica brewing company (through acquisition of the parent Baltic Beverages Holding), Carlsberg would control over 35 per cent of the Russian beer production and have the possibility to restrict competition. FAS cleared the deal but, as a condition for clearance, ordered behavioural undertakings on Baltika. Baltika will have to give FAS two months’ notice of any planned increases or cuts of more than 10 per cent in its beer prices, the service said. It should also not allow any limitations on beer sales or refuse to supply beer on any unjustified economic or technical grounds.
A conditional clearance was also issued in the acquisition of ZAO Toplivno-zapravochnaya-Samara by OOO Lukoil-aero and Lukoil Aviation Bulgaria EOOD and in the acquisition of OAO Volgskaya TGK, a producer of electrical and heating energy by ZAO KES. In the latter FAS ordered the buyer ZAO KES to divest assets used in the process of electrical energy production.
FAS’s recent practice emphasises the fact that all the information submitted to FAS must be coherent in relation to the information possibly earlier submitted to the authority and not misleading. FAS has, for example, dismissed a notification where the applicant company failed to submit information on its ultimate beneficial owners and the financing sources of the transaction. FAS has also refused to issue consent when it has deemed the filed information incomplete and lacking transparency regarding the structure of the company’s owners.

Intra-group transactions

It may come as a surprise to foreign companies that in Russia there has been an obligation to notify FAS of intra-group transactions, that is, transactions between members of the same group of entities. In the new Competition Law intra-group transactions are exempted from the pre-completion notification duty. Companies should, however, pay attention to the special conditions that have to be fulfilled in order to qualify for the exemption. Furthermore, a post-closing notification is still required even if the conditions for the exemption are fulfilled. And, unfortunately, the post-closing notification might prove to be an even more complicated exercise than the pre-closing notification.

Recent trends and developments

The new Competition Law has proven a useful tool for FAS to deal with the abuse of dominance and cartel cases. However, a lot of secondary legislation is still missing, complicating the effective enforcement of the law. The absence of implementing decrees and guidelines also makes it difficult for the companies to apply the new Competition Law.
The proposals to lower the dominance thresholds in the retail sector and the initiative of FAS and the Ministry of Internal affairs to conduct joint cartel investigations show that the Russian authorities are serious about protecting competition.
It is also expected that FAS will propose amendments to the Criminal Code by introducing criminal liability for executives responsible for cartels and the abuse of dominant position. In public, FAS has proposed jail sentences of up to 10 years for hard-core infringements.
At the same time, there are initiatives that could affect the applicability of the merger control rules. The law governing foreign investments in companies operating in strategic fields recently entered into effect.⁷ Compared to the general provisions of the Competition Law, the Law on Investment introduces restrictions and additional requirements for foreign investors with respect to participation in Russian companies of strategic importance to national defence and security, or the conclusion of transactions resulting in control over such entities. Pursuant to the Law on Investment, a company is deemed have strategic importance to national defence and security if incorporated in Russia and if it operates in the following areas: nuclear materials or radioactive substances, coding or cryptograms, weapons and military equipment, aviation security, space activity, fixed telephone communication, geological surveying and mining at mineral deposits. The list of activities envisaged by the law, totalling 42, is exhaustive.
The importance attached to the Law on Investment is illustrated by the creation of a new government commission to monitor foreign investment in Russia, headed by Prime Minister Vladimir Putin and with the head of FAS, Igor Artemiev, as its secretary.

Notes

1 The authors would like to thank Sardaana Nogovitsyna, associate, for her assistance in preparing this article.
2 The Russian competition legislation also includes other federal laws, government regulations and legal acts issued by FAS, as well as international treaties entered into by the Russian Federation.
3 According to the Federal Bill on Commercial Activity, retail companies trading in these products will be deemed dominant if their market share within city limits or the boundaries of municipal regions exceeds 15 per cent. Furthermore, the market share of such companies must not exceed 35 per cent, unless (i) competition is not eliminated, (ii) production is improved, (iii) technological or economic progress is stimulated, (iv) competitiveness of Russian goods on the world commodity market is enhanced or (v) customers profit from the raised market shares.
4 On 30 June 2008, the Plenary Meeting of the Supreme Arbitration Court of the Russian Federation (SAC RF) approved a resolution ‘On Certain Issues Emerging in Connection with Application of the Competition Law by Arbitration Courts’. The purpose of this document is to ensure a uniform approach to the resolution of disputes in the competition areas and was drafted by SAC RF in cooperation with FAS.
5 Mergers and consolidations involving financial companies, as well as the acquisition of shares, assets and rights with respect to financial companies, are covered by special legal provisions.
6 Including filing a notification containing false facts, a breach of order and terms of filing.
7 The Federal Law on Investments No. 57-FZ dated 29 April 2008 on Investment Procedures for Economic Entities of Strategic Importance to National Defence and Security.

An extract from The European Antitrust Review 2009