Changes to Russian Competition Legislation

Numerous changes to Russian competition legislation came into effect in August 2009.

On 16 July 2009, Resolution No. 583 of the Government of the Russian Federation city of Moscow "On Instances of Admissibility of Agreements Between Economic Entities" ("Resolution No. 583") was adopted. On 17 July 2009, amendments were approved to the Federal Law "On Protection of Competition" (the "Law") and the Code of Administrative Violations of the Russian Federation ("CAV RF"). On 29 July amendments were approved to the Criminal Code of the Russian Federation regarding breaches of legislation on competition (the "CC RF").

The changes significantly expand the application of the Law and clarify the competence of the Russian Federal Antimonopoly Service (the "FAS"), alter the dominant position rules, the concept of "monopolistically high" and "monopolistically low" prices, introduce significant changes to the provisions dealing with vertical agreements, raise the thresholds that trigger the requirement for clearance of acquisition transactions through FAS, set the period for institution and consideration of cases on violation of antimonopoly legislation, and also otherwise augment and clarify various legislative acts in the area of antimonopoly regulation.

Main changes envisaged by the amendments

·         Scope of application of the Law

The Law now covers not only agreements, but also the actions, of Russian and foreign entities, if such agreements (actions) are executed (performed) with regard to fixed assets located in the Russian Federation, intangible assets, shares (participatory interest) of Russian companies or rights to them or, which is important, affect the state of competition in Russia. Thus, any agreements and actions, executed or performed by or between foreign organizations (including those governed by foreign law) that are either executed (performed) with regard to Russian assets, shares and rights, or otherwise affect competition in Russia, will formally come under the effect of the Law.

·         Change of concepts: group of persons, monopolistically low or monopolistically high price

The concept "group of persons" is supplemented by a new ground 15, pursuant to which a group of persons of a company may include individuals and (or) legal entities that, in accordance with any of the 14 grounds listed in the Law, are included in one group of persons and, by virtue of their common participation in such a company (or in accordance with the powers of other persons), hold more than 50 % of voting shares (participatory interest) in the charter capital of the company.

There is also clarification of the concepts "monopolistically high" and "monopolistically low" price of goods, which are defined using both the cost plus method (estimation of required expenditure for production of goods) and the "comparable markets method" (comparison with price established in market conditions in Russia or which is important, elsewhere).

The legislative amendments also set criteria when the raising, maintenance or lowering of the price of goods may lead to the establishment of a monopolistically low or monopolistically high price. Such criteria include, inter alia, the expenses of an enterprise, changes in the composition of sellers or buyers of goods, and also changes in the conditions of sale of goods connected with changes in state tax or tariff regulation. It is also clarified that a "monopolistically high" price of goods does not apply to goods resulting from innovative activity.

·         Dominant position

The amendments have practically removed the previously existing 35-percent threshold for recognizing the position of an economic entity as dominant. If certain conditions established by the Law are met, the FAS may, based on an analysis of the state of competition on the relevant market, recognize the position of an economic entity as dominant, even if its share of the market in question is below 35%.

·         Abuse of dominant position

For purposes of countering abuse of a dominant position by an economic entity, for the first time, the Law requires the Government of the RF to develop rules for non-discriminatory access to commodities markets and (or) goods produced or sold by natural monopolists.

·         Regulation of vertical agreements

Amendments to the Law substantially correct regulation of "vertical agreements". In particular, the prohibitions established by cl. 1 art. 11 of the Law have been revoked with regard to vertical agreements.  This clause contained the prohibitions that created most obstacles for businesses: prohibition on the division of a commodities market on territorial principles, scope or assortment of sales or purchase of goods, composition of sellers and buyers, etc.  Pursuant to the changes, conditions on exclusivity in any form are not expressly prohibited in vertical agreements, including distribution agreements. In its new version the Law grants sellers and buyers the opportunity to include more flexible provisions into their agreements.

Instead of the prohibitions revoked by the Law, it now introduced only two direct prohibitions for vertical agreements: (i) the parties may not agree on a price for resale of goods, and (ii) the seller may not require the buyer not to permit the sale of competing goods, with the exceptions of agreements on the organization of sale of goods under a trademark or company name of the seller.

Apart from previously envisaged rules on permissibility in accordance with the "rules of reasonableness", established by part 1 art. 13 of the Law, all limitations relating to commercial concession agreements and agreements in which the share of its parties does not exceed 20% on any market, have been lifted.

Furthermore, certain instances when vertical agreements are allowed (so-called "general exceptions") are established pursuant to Resolution No. 583.

Resolution No. 583 allows agreements between sellers and buyers of goods (with observance of specific conditions) and agreements on joint scientific research and joint use of its results.  Sellers and buyers will be allowed to conclude agreements if their share of the market is less than 35%, and they don't compete with each other (with the exception of the market for the goods that are the subject of the agreement), and if the buyer does not produce interchangeable goods. Resolution No. 583 also sets a number of mandatory conditions for such agreements.

However Resolution No. 583 introduces certain limitations on the "general exceptions". For instance, it does not allow conditions preventing buyers independently setting the resale price of goods, preventing the buyer reselling goods to a certain category of customers, inhibiting the sale of spare parts to retail purchasers or specialized repair and servicing organizations, prohibiting resale in a subsequent sale agreement and others. Certain conditions are permissible only in the existence of other specific conditions or may be introduced for a specific period. In particular, agreement conditions that forbid a wholesale buyer to resell goods on a specified territory are permissible; provided that the sale of goods on that territory is not conducted by another (exclusive) buyer or the seller itself.  

·         Control over transactions on economic concentration

Amendments to the Law increase the threshold values of the aggregate amount of assets of the acquirer and company (including their groups of persons), the shares (participatory interest), assets and rights of which are acquired before triggering the need for preliminary consent of the FAS.  The threshold for aggregate amount of assets has increased from 3 to 7 billion rubles, and for revenue – from 6 to 10 billion rubles. Moreover, the aggregate amount of assets according to the latest balance sheet of entities (and their groups), whose shares (participatory interest), assets or rights to which are acquired, is increased from 150 to 250 million rubles. Threshold values are also doubled for assets above which the FAS must be notified about the execution of a transaction: from 200 to 400 million rubles for the aggregate amount of assets of the acquirer of shares (participatory interest), assets or rights relating to the company and the company itself (and their groups of persons), and from 30 to 60 million rubles for the aggregate amount of assets of the company and its group of persons.

Preliminary approval of transactions performed within one group of persons has been revoked. From now on the execution of transactions within one group by persons united on the basis of ownership of more than 50% of voting shares (participatory interest) in the charter capital is subject only to the notification procedure.

The amendments clarify the list of persons bearing responsibility for obtaining approval for a transaction from the FAS. Thus, reiterating the legislation on competition of 1991 and the practice that has emerged over the past couple of years, the Law establishes the obligation of the acquirer of shares (participatory interest), assets and rights of companies to obtain preliminary approval of the FAS for such transactions.  This obligation can not be transferred to the seller.

The FAS can now also reject an incomplete application.

·         FAS authority to conduct investigations on compliance with antimonopoly legislation

The possibilities of the FAS to investigate compliance with antimonopoly legislation have been broadened and clarified.  The FAS is endowed with the authority to conduct scheduled and unscheduled investigations of bodies of executive power at various levels, state non-budgetary funds, local government bodies, commercial and non-commercial organizations, private individuals, including individual entrepreneurs.

The grounds for a scheduled investigation is expiry of 3 years from the date of (a) incorporation of a legal entity or organization, state registration of an individual entrepreneur or (b) conclusion of the last scheduled FAS investigation. Thus, scheduled investigations should not be conducted more than once every 3 years.

The grounds for an unscheduled investigation are materials and information indicating violations of antimonopoly legislation. An additional cause is the expiry of the period for fulfillment of an order issued FAS' review of an antimonopoly violation.

The subject of both a scheduled and an unscheduled investigation is quite broadly defined – observance of the requirements of antimonopoly legislation. The subject of an unscheduled investigation may also be a check on the fulfillment of an order issued earlier.

·         Limitation period for violation of antimonopoly legislation and administrative violations

For the first time, the limitation period for actions regarding violation of antimonopoly legislation has been established at the legislative level. This period is 3 years from the date of a violation of antimonopoly legislation, and in the case of a continued violation – from the date of cessation of the violation or its discovery. If a case on violation of antimonopoly legislation is instituted after the indicated period it is subject to dismissal.

The commencement of the period of limitations has been established for administrative violations envisaged by the following articles of the CAV: 14.9 (unlawful limitation of freedom of trade), 14.31 (abuse of dominant position), 14.31.1 (abuse of dominant position with a share of less than 35%), 14.32 (prohibition of agreement, concerted actions, coordination), 14.33 (unfair competition).  The indicated period is calculated from the effective date of the decision of the FAS committee that establishes the fact of violation of antimonopoly legislation.

·         Other changes

Easing of conditions for transfer of state and municipal property without tenders

Changes in the Law envisage a considerable amplification of the list of grounds allowing the transfer of state or municipal property without tenders or auctions. Inter alia, there are now several grounds concerning special entities with which such an agreement may be executed: (i) legal entities that provide educational and medical services, (ii) legal entities owning engineering and technical supply networks (e.g. companies rendering communications services), (iii) and also most forms of non-commercial organizations, including associations, unions, employers' groups.

At the same time, control is strengthened over the setting of rules for the conduct of competitions and auctions for the execution of agreements concerning state and municipal property. Now the body responsible for such rules is the FAS (previously it was the Government of the RF), which, in all likelihood, will result in quicker decisions regarding the approval of such rules.

There is also a practical prohibition on subleasing state and municipal real estate, insofar as no more than 10% of the total area of leased property and not more than 20 square meters may be subleased.

Introduction of the concept of state or municipal preferences

The chapter of the Law pertaining to state or municipal preferences is similar to the chapter it replaces concerning the granting of state and municipal aid. However, the concept "state and municipal preferences" is broader than the previously effective concept of "state and municipal aid" as it includes not only the transfer of property or objects of civil rights, but also the granting of property concessions (e.g. the establishment of a concessionary rate of rental payments).

That said, the granting of preferences is permitted only in connection with the attainment of publicly significant and social aims, such as protection of public health, development of education and science, ensuring the defense capability and security of the country, and also support for small and medium businesses.

Changes to the CAV RF

The abuse of a dominant position on the commodities market continues to incur a "turnover" administrative fine of 1% to 15% of the revenue of the violator from sale of the goods (works, services) concerned. However, it is clarified that if the revenue of the violator exceeds 75% of its total revenue from all sales, the fine is established at 0.3% to 3% of the revenue from the sale of the relevant goods. In accordance with the new version of the relevant article of the CAV RF, the fine levied for the above-mentioned violations cannot be less than 100,000 rubles.

A minimum fine of 100,000 rubles is also envisaged by the changes to the CAV RF for a "turnover" fine from a legal entity for the execution of an agreement limiting competition (performance of actions limiting competition), and also for the coordination of economic activity. With regard to the latter, the levying of a "turnover" fine is introduced for the first time.

There is also a tightening-up of the "leniency program" that envisages the possibility of release from administrative liability for certain violations of the law. Release from administrative liability pursuant to amendments to the CAV RF applies to the entity that was first to perform all the requirements envisaged by the CAV RF. An application submitted simultaneously on behalf of several entities is not subject to consideration. Furthermore, the changes do not envisage the application of the "leniency program" to the coordination of economic activity.

For the first time, administrative liability of officials and legal entities is introduced for abuse of the dominant position of an economic entity whose share of a specific market is less than 35%; in an amount of up to 20,000 rubles and 1,000,000 rubles respectively.

Changes to the CC RF

The new version of art. 178 of the Criminal Code of the RF envisages criminal liability in the form of a fine or imprisonment for a period of up to three years, and revocation of the right to occupy certain positions (engage in certain activity) for up to one year or without the same for the non-admission, limitation or elimination of competition through the execution of agreements or performance of concerted actions or continued abuse of a dominant position, if such actions have caused large-scale damage (exceeding 1,000,000 rubles) to individual citizens, to organizations, to the state or, for the first time, have resulted in receipt of large-scale revenue (exceeding 5,000,000 rubles). In the event of the infliction of particularly large-scale damage (exceeding 3,000,000 rubles) or gaining particularly large-scale revenue (exceeding 25,000,000 rubles), criminal liability becomes more rigorous in the form of imprisonment for a term of up to six years.