Russian Federation: Russian Competition Practice Alert

In July 2009 the Russian Federation ("RF") State Duma adopted and the Council of Federation approved several important changes to Russia's antimonopoly laws that are aimed at improving and strengthening antimonopoly control, specifying antimonopoly procedures with greater precision, and increasing the liability for antimonopoly offenses and crimes. These changes have been implemented by way of amendments to the Federal Law on Protection of Competition (the "Competition Law"), to the RF Administrative Penal Code, and to article 178 of the RF Criminal Code.

Most of the amendments entered into force in late August. The amendments to article 178 of the RF Criminal Code will become effective October 30, 2009.

In this alert, we address the most significant changes to the RF legislation introduced by the above amendments.

Competition Law Amendments

Scope of application

The amendments considerably expand the Competition Law's applicability to transactions and actions outside the RF. The Competition Law now applies to actions or agreements outside the RF between Russian and/or foreign entities or organisations if such actions or agreements concern:

• fixed and/or intangible assets in the RF, or
• shares/ equity interests in business entities, rights concerning commercial organisations which operate in the RF or otherwise affect competition in the RF.

This significantly complicates the analysis from a Russian antimonopoly perspective of transactions that take place outside the RF, for two reasons.

First, the Competition Law does not specify that the asset value and revenue thresholds established for the purpose of regulating economic concentration relate only to asset values and revenues in the RF. Rather, the asset value and revenue thresholds which are applicable to the purchaser and the target (or to the parties, participating in incorporations or reorganizations of commercial organizations) and their respective relevant groups apply to those figures on a worldwide basis.

Moreover, the amendments fail to clearly define the criteria of "operating in the RF", or "otherwise affecting competition in the RF", the criteria that bring agreements and actions made outside the RF within the ambit of the Competition Law. Potentially, many foreign transactions (including within groups of companies) involving major foreign companies could fall within the scope of Russian antimonopoly regulation despite having a relatively minor nexus to the RF.

Supervision of economic concentration

The amendments have increased the balance sheet asset value and revenue thresholds at which prior antimonopoly clearance or subsequent notification, as the case may be, of regulated transactions, incorporations or reorganizations of commercial organizations (other than financial institutions).

The thresholds at which the prior approval of Russia's antimonopoly authority, the RF Federal Antimonopoly Service or its territorial divisions ("FAS"), is now required for acquisitions of shares or participatory interests, assets or rights, have been raised from:

• 3 billion rubles to 7 billion rubles (approximately 155 million euros) for total balance sheet asset value of the acquirer and the target and their respective groups of persons (or for founders in case of establishment of a new company plus the target plus their groups of persons); and
• 6 billion rubles to 10 billion rubles (approximately 220 million euros) for the annual revenue of the acquirer and target and their respective groups of persons (or for founders in case of establishment of a new company plus the target plus their groups of persons).

The balance sheet asset value and revenue thresholds that require subsequent notice to FAS of the regulated transactions, incorporations or reorganizations have likewise been raised from 200 million rubles to 400 million rubles (approximately 9 million euros).

The above thresholds for prior consent of or subsequent notice to FAS only apply, however, where the balance sheet asset value of the target company and its group exceed certain amounts, which have also been raised: from 150 million rubles to 250 million rubles (approximately 5.5 million euros) for prior consent, and from 30 million rubles to 60 million rubles (approximately 1.3 million euros) for subsequent notice.

RF Government Resolution No 591¹ raises the antimonopoly supervision asset thresholds for credit organisations participating in merger or accession from 14 billion rubles to 24 billion rubles (approximately 530 million euros) in the aggregate, and for credit organizations whose shares/participatory interests, assets, or rights therein are acquired from 4 billion rubles to 6 billion rubles (approximately 130 million euros).

A notification procedure has been introduced for transactions among persons forming a group of persons on the basis of article 9.1.1 of the Competition Law (i.e., a business entity and any person holding more than 50 per cent of the total voting shares in that business entity).

When applying for prior approval or subsequent notice, information must now be filed on persons in whose interests more than 5 per cent of shares in the applicant are held. This represents more of a legal than a practical change, however, as FAS has already long requested the information on the final beneficial owners of the relevant entities.

Vertical and permissible agreements

The list of absolute prohibitions with respect to vertical agreements² has been shortened significantly. Thus, vertical agreements are prohibited only if:

• they result or may result in setting the resale price of goods; or
• the seller forbids the buyer to sell competing goods (except for agreements on the sale of goods under the trademark or the firm name of the seller or producer).

As an exception to the above prohibitions, the Competition Law expressly permits:

• written vertical agreements (except between financial organisations) that are franchise agreements; and
• vertical agreements between business entities (other than financial organisations), provided no party has a market share of over 20 per cent.

Following the new rules, it appears that only non-problematic vertical agreements are those that fall under the express exemptions (i.e., a single separate franchise agreement and a single separate vertical agreement between parties, not being financial organisations, each having a market share on any market of no more than 20 per cent). It also appears that in cases where several parallel vertical agreements (e.g., forming a distribution network) are concluded, the new rules on vertical agreements should be applied with double care, as the distribution network could be viewed under specific circumstances as the coordination of economic activity, which is forbidden if it leads to the consequences that fall under absolute prohibitions on agreements and coordinated actions restricting competition.

Other types of vertical arrangements appear to remain subject to the restriction (although not absolute) on any agreements that lead or may lead to the restriction of competition as well as the ban on the coordination of economic activity which leads or may lead to the to the consequences that fall under absolute prohibitions on agreements and coordinated actions restricting competition.

However, it is not fully clear how the new rules on vertical agreements should correlate with the general exemptions from the ban on restrictive agreements and coordinated activities and requirements established (almost simultaneously with the amendments to the Competition Law) by RF Government pursuant to Article 13.2 of the Competition Law in Resolution No. 583³ with respect to:

• agreements between buyers and sellers, which include, in particular, agreements between actual or potential buyers and sellers that satisfy each of the following conditions:
• • the seller sells the good to two or more buyers and has a market share for that good of less than 35 per cent, or in accordance with the agreement sells the good to a single buyer that has a market share for that good of less than 35 per cent;
  • the seller and the buyer do not compete with each other or compete on the goods market on which buyer buys the good for subsequent resale; and
  • the buyer does not produce goods interchangeable with the goods that are the subject of the agreement), or

• agreements between business entities on joint research and joint use of the results of research.

Clarification and guidance is required from FAS in this respect.

Dominant position now possible with a market share < 35 %

FAS is now able, subject to certain conditions, to determine that a company is dominant if it has a market share of less than 35 per cent, but still greater than that of other businesses on the relevant market, and it is capable of decisively influencing the general conditions of that market. Previously, a company with a market share of less than 35 per cent normally could not be found dominant, save in cases of dominance of several businesses specified by the Competition Law and other specific cases set forth by other federal laws (e.g., in the electric energy sector).

Group of persons

A business entity and persons (that form a group of persons on other grounds) that hold in aggregate more than fifty per cent of voting shares in that business entity are now deemed to form a group of persons. This is an additional criteria that substantially extends the scope of a group of persons under Russian law. In fact, this amendment has fixed in the law the interpretation previously given by the RF Supreme Arbitration Court on the group of persons and has put an end to the debates on whether the group of persons should encompass only the entities or persons up to a second or third level of group links. It appears now that all the entities and persons up and down the vertical chain of control should be included in the group of persons. Moreover, this additional criteria does not allow one and the same entities and/or individuals to separate one group of persons from the other by splitting their shareholdings into minority stakes. Even if done so, under the new rule the minority stakes in various entities are to be considered in aggregate.

Antimonopoly inspections

The powers of FAS to make scheduled and unscheduled inspections have been expanded. These powers extend not only to inspections of commercial organisations, but also of state authorities and agencies as well as noncommercial organisations and natural persons.

FAS now has the right to make dawn raids to search for agreements restricting competition and coordinated actions.

Three-year term for initiating and considering antimonopoly cases by FAS under the Competition Law

FAS's ability to initiate and consider antimonopoly cases under the Competition Law is now subject to a maximum three-year statute of limitations, running from the date of the antimonopoly offense (or, for continuing offenses, from the date the offense ended or was discovered). Upon expiry of this term, antimonopoly proceedings in respect of the given matter cannot be initiated by FAS, and any antimonopoly case that has been opened must be terminated.

It is questionable whether this new rule will impact (and if so, to which extent) the prosecution of antimonopoly administrative offenses and crimes.

Monopolistically high and monopolistically low prices

The definitions of "monopolistically high" and "monopolistically low" price have been made more precise.

Subject to certain conditions, the price of goods resulting from innovation can not be deemed monopolistically high. "Innovation" is defined as activities resulting in the creation of new non-substitutable goods, or new interchangeable goods produced at lower cost and/or with better quality.

Natural monopolies

In order to prevent the abuse by natural monopolies of their dominant position the RF Government is authorized to adopt rules on non-discriminatory access to goods markets and goods produced or sold by natural monopolies. The amendments to the Competition Law introduce a detailed and extensive list of requirements for such rules.

State and municipal preferences

The term "state or municipal aid" has been replaced with "state or municipal preferences". The grounds and procedure for granting state and municipal preferences, and for the state authorities to receive the approval of FAS for preferences, have been revised.

Procedure for concluding agreements concerning state and municipal property

The lists of cases where a tender or auction is required to enter into an agreement concerning state or municipal property has been revised, and those where a tender or auction is not required have been expanded.

FAS has been authorised to establish the procedure for tenders and auctions for the right to enter into agreements concerning state and municipal property, and to determine which properties require a tender.

From January 1, 2011, information on tenders and auctions for the right to enter into such agreements must be published on the official website determined by the RF Government.

Until July 1, 2015, small and medium businesses (with certain exceptions) have the right to renew state or municipal property lease agreements concluded before July 1, 2008 without a tender or auction.

Administrative Liability for Antimonopoly Offenses

Actions and agreements restricting competition

The amendments have expanded and revised the list of administrative offenses relating to

• conclusion of agreements restricting competition, coordinated action restricting competition
• abuse of dominant position on a goods market; and
• restriction of competition by state and local authorities.

The list of anticompetitive actions and agreements that are punishable by revenue fines has been expanded. The minimum fine has been set at 100,000 rubles for legal entities.

Administrative penalties have been established for coordination of economic activity that is impermissible under antimonopoly law and for abuse of dominant position by a business entity with a market share for a particular good of less than 35 per cent.

The list of conditions on which a person voluntarily reporting the conclusion of an anticompetitive agreement or action is released from liability has been expanded. Thus, only the person that first reported to FAS on the conclusion of the anticompetitive agreement is released from liability, provided the information has been sufficient to discover the offense, FAS did not possess the information before the report was filed, and the person has refused to participate or participate further in the reported anticompetitive agreement . Reports made simultaneously by several parties may not be considered by FAS.

State and local officials can now be barred from office for antimonopoly offenses.

The statute of limitation for administrative prosecution for:

• restriction of competition by state and local authorities;
• abuse of dominant position;
• concluding agreements restricting competition or coordinated actions restricting competition;
• coordination of economic activity; and
• unfair competition

now runs from the date on which an antimonopoly authority decision establishing the offence enters into force.

Supply of goods, works, or services for state and municipal needs

The amendments have expanded the list of administrative offenses involving breaches of procedure for placement of orders to supply state or municipal needs, or performance of state or municipal contracts for supplying state or municipal needs.

Administrative penalties have been established for breach of refund terms, procedures and/or terms for blocking account operations of a procurement participant; breaches of procedures for maintaining the register of procurement participants, or of documentation rules for electronic public auctions; and for announcement of information on procurement participants by the electronic clearing operator before the results of an electronic public auction have been announced.

Administrative penalties have been introduced for failure to provide information on the conclusion, amendment or termination of state or municipal contracts to the authority responsible for maintaining the register of state and municipal contract.

Criminal Liability for Antimonopoly Offenses

The amendments to article 178 of the RF Criminal Code introduce criminal liability in case of prevention, restriction, or removal of competition by:

• concluding agreements restricting competition or performing actions restricting competition;
• repeated abuse of dominant position, in the form of the establishment and/or maintenance of monopolistically high or monopolistically low prices, unjustified refusal to or avoidance of conclusion of an agreement, or restriction of market access,

that in either case results in damage to individuals, organizations or the state of more than 1 million rubles (approximately 22,000 euros) or income of more than 5 million rubles (approximately 110,000 euros).

Repeated abuse of a dominant position is deemed established by more than two offenses during a three-year period for which the dominant person was administratively prosecuted.

The types of offenses punishable by tougher penalties have now been widened to include offenses which result in damage to an individual, organization or the state of more than 3 million rubles (approximately 66,000 euros) or income derived by the offender of more than 25 million rubles (approximately 550,000 euros).

Fines and terms of imprisonment have been increased for the above-listed crimes, and individual offenders may now be barred from certain positions or activities for up to three years.

Persons that assist in crime-solving, compensate damages, or pay income derived from the offending activities into the federal budget may be released from criminal liability.

Footnotes

^{1 RF Government Resolution on Amendment of RF Government Ruling No. 335 of May 30, 2007, No. 591 of July 17, 2009.}

^{2 A vertical agreement is defined by the Competition Law as an agreement between noncompeting business entities, one of which purchases or could potentially purchase products from the other business entity and the other entity provides the products or could potentially sell the product.}

^{3 RF Government Resolution on Cases of Permissible Agreements between Business Entities, No. 583 of July 16, 2009, published July 23, 2009, effective July 31, 2009}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.