Competition Practice Newsletter (Issue 6, 2016)
News and Events
FAS Russia seminar looks at tariff regulation issues in 2016 and possible reforms in 2017
On 20 October 2016, FAS Russia organized a seminar in Yalta on "Tariff Regulation in 2016 and Tasks for Regulatory Agencies for 2017." The Head of FAS Russia, Igor Artemyev. delivered a report explaining existing problems in tariff regulation and the main directions of proposed reforms. These changes will be one of the most sensitive and talked-about legislative packages in 2017.
Mr. Artemyev said that the main shortcomings of the current tariff policy are: the lack of a unified system of tariff regulation principles; the lack of a cost allocation system for natural monopolies; the practice of setting tariffs based on costs; and the inequities caused by the lack of a single reference for tariff regulation law.
Mr. Artemyev observed that, considering the socio-economic situation in the country, growth rates should be below inflation. Moreover, there is a need for more cooperation between federal and regional tariff bodies.
FAS Russia currently is developing a draft law, On the basis state regulation of prices (tariffs) in the Russian Federation. This will be the first comprehensive legislation governing tariff regulation in the Russian Federation. FAS Russia believes that the new law will ensure stable and non-discriminatory conditions for doing business in the areas where the state regulates tariffs. It also will provide for: setting tariffs based on their economic feasibility; long-term tariff setting; and greater transparency in the activities of regulated entities and their regulators. Tariff setting will become electronic under the new law, which will establish a single electronic system that unites the collection, analysis, and processing of documents and materials.
FAS Russia also is preparing amendments to the Code of Administrative Offenses, to provide for a more flexible system of penalties for violations of tariff legislation. Violations of tariff legislation will be handled by administrative procedures that are analogous to current procedures to deal with antimonopoly violations.
Stevedoring companies discuss service rates with FAS Russia
On 19 September 2016, FAS Russia held a working meeting about the rates charged by stevedoring companies in seaports. The participants included: the Head of FAS Russia, Igor Artemyev; the Deputy Head of FAS Russia, Alexander Redko; the first vice-president of Russian Railways, Anatoly Krasnoshchek; Alexander Kalinin, who is the president of Supports of Russia, a public organization of small and medium businesses; representatives of the Federal Agency of Sea and River Transport and the Rosmorport Federal State Unitary Enterprise; as well as representatives of shippers and stevedoring companies.
The main issue was the exchange rate for stevedoring services paid in foreign currency into rubles. The recent strengthening of the U.S. dollar has made this issue a priority for FAS Russia. In the October 2016 conference in Yalta on tariff regulation, FAS Russia mentioned another reason for its attention to the stevedoring companies: FAS Russia’s concern that the higher profits produced by the exchange rate were being siphoned off abroad.
FAS Russia proposes to address this issue by converting to rubles all the prices charged by stevedoring companies in Russia. Supporters of this position argue that conversion to rubles is important to manage the effects of exchange rate fluctuations and to avoid sharp price increases for stevedoring services that they possibly could cause.
Most of the stevedoring companies, as well as the Association of Commercial Seaports, do not support full conversion of their tariffs to rubles.
The Association of Sea Commercial Ports reports that, from January through August 2016, only 9% (44 million tons) of the total volume handled were coastal cargo. Domestic transport (including cabotage transport) costs already are always calculated in rubles; therefore, a change of currency for the loading or unloading in inland transport will not lead to a reduction in tariff costs.
Most the stevedoring customers for export cargo (79% of the total, or 371.6 million tons) and imports (4.2%, 20.5 million tons) are foreign shipping companies, whose fees already include port handling. Pricing these services in rubles will not reduce the transportation costs for shippers, and will only increase the profit margins of foreign shipping companies. In addition, pricing in rubles can create currency risks for companies with debt denominated in foreign currencies.
A positive effect of the 19 September 2016 meeting was the beginning of a direct dialogue between the regulator and the stevedoring companies. This could contribute to reaching a compromise on the issue of the pricing of stevedoring services. One such possible compromise mentioned during the meeting was to establish a combined calculation depending on the purpose of transport: to use dollar rates for non-residents and ruble rates for Russian companies. Another positive outcome was the agreement of the parties to create a working group to try to develop a fair formula for calculating the cost of services of stevedoring companies.
In our opinion, the statements of executive staff of FAS Russia in Yalta do not yet contribute to a full and constructive dialogue between the regulator and the regulated businesses, and failed to meet hopes for an objective analysis of the competition in the market for stevedoring services, either to confirm or refute FAS Russia's concerns. Some cases of alleged price-fixing of stevedoring services currently are under consideration; but the lack of a well-informed analysis of the effects on competition cause additional difficulties for the defendants in those cases.
“Competition in Russia Week” Forum
From 26 to 28 September 2016, FAS Russia held a forum in the Moscow region, “Competition in Russia Week” to observe the 25th anniversary of the regional antimonopoly bodies Representatives of the government, business sectors, international organizations, and the heads of the competition authorities of foreign countries participated. This year’s Forum included topics such as: roundtables on the problems in the pharmaceutical market; sessions of international working groups for the development of competition in the international roaming telecommunications markets; consideration of antimonopoly policy questions; and a study of competition in the food markets.
The key event was the meeting of the Extended Collegium of FAS Russia, held on 28 September in the headquarters of the Moscow regional government. First Deputy Prime Minister Igor Shuvalov, Head of FAS Russia Igor Artemyev, Russian Minister Mikhail Abyzov, and Moscow Region Governor Andrey Vorobyov were the main speakers. Mr. Shuvalov said that the development of competition is among the major economic issues on the agenda of the Russian Government.
"Competition in Russia Week" had a favorable impact on the cooperation between FAS Russia and foreign competition authorities. Igor Artemyev used this occasion to sign a memorandum of cooperation with representatives of the Austrian Federal Competition Authority, the Commission on Protection of Economic Competition of Brazil, the Fair Trade Commission of the Republic of Korea, the Republic of Belarus Ministry of Antitrust, and trade and competition authorities of Italy and South Africa. Representatives of these agencies expressed their interest in further cooperation and exchange of relevant practices and initiatives in the field of antimonopoly response.
FAS Russia to develop a national competition development plan
On 29 September 2016, at the meeting of the Government of the Russian Federation, FAS Russia Head Igor Artemyev delivered an annual report "On the State of Competition in the Russian Federation." Public authorities will use this report to set priorities and to develop legislative measures to ensure competition.
FAS Russia has also taken the initiative to create a national plan for the development of competition in 2017 and 2018. The Prime Minister of the Russian Federation, Dmitry Medvedev, approved the initiative and ordered the sectoral ministries to coordinate with the Ministry of Economic Development and FAS Russia in programs to develop competition in the relevant sectors.
The main task envisioned by FAS Russia for the development of competition is to reduce the public sector of the economy. The first such plan, drafted on 5 August 2016, proposes to give FAS Russia additional power to review all legislation for its possible effects on competition, and to require the regional authorities to submit annual reports on competition development. However, the Ministry of Economic Development did not support this version of the draft; and a revised plan will be presented to the President of the Russian Federation soon.
Judicial and Administrative Practice
Roskhimzaschita convinces FAS Russia that it was not part of a cartel
On 14 October 2016, FAS Russia ruled that Navigator-T Ltd., Tambovmash JSC, the All-Russian Voluntary Fire-Fighting Society, Khimkomplektzashchita JSC, and Strong Group LLC violated Clause 2, Part 1, of Article 11 of the Competition Protection Law in the bidding initiated by the Russian Interior Ministry to buy IPN-20 and SPI-50 self-rescuers. The collusion resulted in Navigator-T winning the bidding at a higher than normal price.
Initially, Roskhimzaschita, a developer and manufacturer of these self-rescuers, also was a defendant. However, even though the company fulfilled the request of Navigator-T to send the desired letters to the customer, the company convinced FAS Russia that its actions were not evidence of an antimonopoly violation. Roskhimzaschita pointed out that the letters had not contained information about specific prices for self-rescuers, and therefore cannot be regarded as an attempt to fix the prices at auction.
This example shows the importance of the introduction of the new antitrust process, developed by an association of antitrust experts. As happened in this case, the statement by FAS Russia of its preliminary conclusions about the circumstances of the case gives the defendant the opportunity to defend itself against clear and definitive accusations.
Arbitration rejects the antimonopoly body decision against buckwheat retailers
On 4 October 2016, the Arbitration Court of the Volga District invalidated the decision of the Tatarstan OFAS, which had found that Zelgros Ltd., Tander JSC, Auchan LLC, Agrotorg, and Trading House Perekrestok CJSC had violated Clause 1, Part 1, of Article 11 of the Competition Protection Law.
The Tatarstan OFAS had found that the parties made an anti-competitive agreement that led or could lead to the unlawful establishment and maintaining of retail prices for buckwheat in the city of Kazan. Canceling the decision of the antimonopoly body, the appeal court concluded that there was no evidence of consistent and synchronized actions by the sellers.
The court concluded that the companies acted based on economic circumstances and pricing, not anti-competitive agreements with each other, and that their coordinated actions were not beneficial to them. Because suppliers had increased wholesale prices for buckwheat, the defendants were forced to buy it at higher prices and, accordingly, charge higher retail prices. Another competitive factor that changed retail prices was the increase in the commercial expenditures the companies incurred, namely non-operating expenses and costs related to exchange rate changes.
The companies submitted to the court an independent expert’s report that analyzed the actual activities of market participants, proving that their actions were aimed at increasing or maintaining sales, while curbing the increases in wholesale and retail prices. These actions would be inconsistent with any anti-competitive agreements that might have existed.
An analysis of buckwheat sales by the companies showed that sales of the entire range of buckwheat in the stores in Kazan in November-December 2014 decreased by 35%, compared to the level of October 2014. This reduction offsets the retail organizations’ increase in margin per unit of products sold, in absolute terms. In those circumstances, the total amount of the margin will grow disproportionately to the increased margin per unit of output and, with a significant fall in sales, will decline. Thus, despite the change in the margin in absolute terms due to the growth in November-December 2014, the per-unit margin and purchase prices for buckwheat declined compared to the level in October 2014.
The Tatarstan OFAS did not make a comparative cost-benefit analysis of the trade organizations’ sale of buckwheat in the study period, and there was no other evidence that they enjoyed excessive profits.
Arbitration Court rejects the regional FAS findings against buckwheat wholesalers
In another buckwheat case, on 12 October 2016 the Arbitration Court of the West Siberian District upheld the decisions of the lower courts to invalidate the Novosibirsk OFAS decision against the Bezmenovsky Elevator Complex.
The Novosibirsk OFAS had found a violation of Part 1, Article 10, of the Competition Protection Law by selling buckwheat to retailers at unreasonably high prices. The competition authority indicated that, under the conditions of the immutability of the purchase prices for buckwheat, Bezmenovsky Elevator Complex LLC increased its prices for buckwheat an average of 250% between August and December 2014. The OFAS concluded that these actions were economically unreasonable and led to the infringement of the interests of consumers of the food product.
The Arbitration Court of Novosibirsk Region noted flaws in the OFAS analysis of the state of competition in the commodity market. The OFAS failed to prove a dominant position of the company in the market for the wholesale distribution of buckwheat in the Novosibirsk region in 2014, as part of a group of wholesalers; and there was insufficient evidence to support a conclusion that the price increases were unreasonably fast.
The Arbitration Court of the West Siberian District also pointed out that the antimonopoly authority did not question all buckwheat retailers in the Novosibirsk region to determine the full effects of the increase in wholesale prices, nor did the OFAS document any irregularities in the supply of buckwheat from other regions.
Instead, to prove unreasonably high price increases, the competition authority relied on the increase in profitability only in November 2014. The OFAS did not consider the seasonal features of the buckwheat market, specifically that trade usually increases in the fourth quarter, when the crop is harvested and the product is being sold. Thus, the return on sales always increases in this period. Moreover, the antimonopoly authority failed to conduct a cost-benefit analysis for all of 2014.
Foreign Experience
U.S. will not impose duties against Russian steel
The United States International Trade Commission, which investigates the impact of dumped and subsidized imports on American industries, has decided not to impose antidumping duties against cold-rolled steel made by Russian companies. The Commission recognized that the volume of imports from Russia into the United States, compared to the volume of imports from other countries, is negligible.
In March 2016, the Office of International Trade of U.S. Department of Commerce announced that it suspected China, Korea, India, Japan, the United Kingdom, Brazil, and Russia of establishing dumping prices for cold-rolled steel products; and it imposed preliminary anti-dumping duties. This happened a month after Russian producers had come under suspicion in the European Union. In August 2016, the European Commission introduced duties of up to 36.1%, to continue for a period of five years.
Legislative and Regulatory Projects
Draft FAS Russia Order, On approval of the administrative regulation of the Federal Antimonopoly Service on execution of state function for the verification of compliance with the requirements of legislation in the sphere of state regulation of prices (tariffs)
This order implements Presidential Decree Number 373 of 21 July 2015, On some issues of public administration and control in the sphere of antimonopoly and tariff regulation, which assigns to FAS Russia the responsibility to exercise control over compliance with legislation on the regulation of tariffs on goods and services. It defines the timing and sequence of administrative procedures for the implementation of the checks on state-regulated prices.
This order repeals FTS Russia Order Number 23-3 of 26 January 2016, On approval of the Administrative Regulations of the Federal Service on Tariffs execution state function of state control (supervision) for the establishment and (or) use of state-regulated prices (tariffs, premiums, fees, interest rates), as well as compliance with disclosure standards, which has been superseded.
Draft Government Decision, On establishing the requirements established by the executive authority of a subject of the Russian Federation for procurement purposes in accordance with paragraph 48 of Part 1 of Article 93 of the Federal Law "About contract system in the procurement of goods, works and services for state and municipal needs," the procedure for determining the limit unit price, the production of which is created or upgraded, and (or) being developed in the territory of a subject of the Russian Federation in accordance with the state contract, as well as the procedure of determining the price of the contract concluded with the supplier-investor.
This draft resolution would further implement Federal Law Number 44-FZ, On the contract system, by establishing requirements for procurements by an executive authority of a governmental body of the Russian Federation. This can include, for example, the determination of the marginal unit price of goods to be created or upgraded, or to be developed under a state contract; and the procedures to determine the price of the contract with the supplier-investor.