View from here: Redefining competition
Changes to competition law in Russia are set to throw the spotlight on key industry players. Maxim Scherbakov reports on how the new legislation will help to ward off criticism from foreign investors and re-focus antimonopoly control
January 25, 2007 at 01:04 AM
6 minute read
Russian competition law has been a target for criticism by foreign investors and the local business community for more than a decade. However, new legislation came into effect in 2006. The key points are as follows.
Two become one
The legislature put two areas of regulation together into one regulatory act: both competition on commodities and the control of financial markets will be regulated by one and the same law. It is considered by the Federal Antimonopoly Service (FAS) that this is a solid approach as, previously, separate laws regulated similar issues.
Beyond Russia's borders
Extraterritorial concept is now well defined – unlike previously. It is now envisaged that antimonopoly regulation will also apply to agreements entered into outside Russia, provided that both of the following conditions are met:
subject matters of such agreements are related to assets or shares (participatory interests) of Russian business entities or to rights in Russian business entities; and
these agreements lead or may lead to limitation of competition in the Russian Federation.
An updated language
A set of basic definitions were either updated, or new terms included, to better reflect changes in economic and political aspects of today's Russia, for example commodity, commodity market, group of persons, monopolistically-high/monopolistically-low price, agreed actions, dominant position, state or municipal aid and so on.
The term 'commodity', as set forth by the new law, has taken a broader meaning and now comprises goods and services, including financial services.
The new law has refined the term 'commodities market' and enables antimonopoly authorities to go beyond territory boundaries of Russia. This term has been specified with the view of economic, technical or other circumstances enabling customers to purchase goods on a particular territory.
Whereas the new law has retained definition of 'unfair competition' with no material change, it has amended the term 'monopolistic activity', which now comprises:
abuse of dominant position;
agreements and agreed actions prohibited by the new law; and
other actions or omissions that are deemed monopolistic activities.
Another key term – 'dominant position' – has undertaken notable revision. The threshold of market share was lowered from the current mark of 65% to 50%, above which a company is obliged to disprove presumption of its dominant position in a relevant market. The so-called lower threshold, below which a company cannot be considered as having dominant position, is unchanged at 35%. However, an exception of 8% for the commodities market has been set forth in the new law, subject to a number of market conditions. In line with recent court practice, subjects of natural monopolies are automatically recognised as having a dominant position (such as Gazprom, RAO UES and so on).
It should be noted that the new law established a strict line between agreed actions (complying with a set of specific criteria) and agreements (both oral and written) limiting competition, all of which can now be subject to penalties.
Definitions of 'monopolistically-high prices' and 'monopolistically-low prices' have been notably refined. Two methods of proving monopolistically-high or monopolistically-low prices are suggested by the new law:
comparison of the given price set by the dominant entity with the price fixed on similar but competitive markets; and
comparison of the given price set by the dominant entity with indispensable expenses plus profits.
Amendment to prohibition of monopolistic activities
Prohibitions were updated and divided into two groups:
absolute prohibitions which cannot be admitted under any circumstances and do not require any proof of negative consequences for competition; and
relative prohibitions of abuse of dominant position, actions or agreements, any of which can be admitted subject to meeting several specific requirements (such as limiting competition agreements but resulting in increase of competitive ability of local goods at international markets, which may be admitted).
A definitive first
This section covers executive bodies of the Russian Federation, its subjects and municipalities, state non-budgetary funds and the Central Bank of the Russian Federation.
For the first time in the history of Russian antimonopoly legislation, the legislature included the definition of state and municipal aid, restrictions hereto and procedures for granting such aid. This may, in the opinion of the FAS, minimise the risk of the state/municipalities distorting competition by preferring certain entities.
State control over economic concentration
Igor Artemiev, head of the FAS, has recently mentioned that antimonopoly regulation should focus on big business rather than small and medium-sized enterprises. Therefore, the overall number of transactions which are under control of the antimonopoly authorities should, in his view, be reduced by 30-fold. To achieve this goal, the new law:
lowered the number of transactions and actions of business entities which would have required preliminary control of the FAS under the previous legislation but which are deemed to not affect competition;
increased the number of criteria identifying transactions as requiring preliminary control of the FAS; and
transferred authority of promulgating secondary legislation from the level of federal antimonopoly authority to the Russian Government.
The new law is now considerably redrafted and specifies detailed procedures as have been requested by the business community. Furthermore, key methodologies have either been included in the new law or will be adopted by the Government in accordance with it.
Violation of the new law
Violation of antimonopoly legislation -including non-filing (both prior approval and post notification) – leads to invalidation of transactions and/or liquidation of legal entities. It should be noted, however, that intra-group transactions are no longer subject to prior consent of the FAS and only require post-transaction notification. The limitation period is unchanged at one year, although it is
not clear whether this is a limitation period of one year from the date of transaction – the FAS traditionally considers one year commencing after disclosure of violation, whereas case law does not support this.
It should also be noted that corresponding amendments to the Administrative Code of the Russian Federation have been suggested by the FAS and are likely to be adopted shortly. Once adopted, these revisions may significantly increase the values of administrative fines, which will be calculated on a pro rata basis (proportionately to the yearly proceeds value of legal entities), unlike the previous maximum upper limit (at time of writing) of approximately $18,700 (£9,500).
By and large, the legislature tried both to improve those mechanisms of the previous antimonopoly legislation which proved to be effective and simultaneously implement new approaches and methods to adequately reflect the current economic and political situation.
The main objective of the new law seems to re-focus antimonopoly control from small and medium businesses to key players in each industry and to ensure that state antimonopoly control becomes an effective means of regulating commodities and financial markets.
Maxim Scherbakov is an associate at Baker Botts in Moscow.
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