Concepts of abuse of collective dominance and concerted practices elaborated by the Russian courts: for better or worse?

21.04.2011

Competition & Antitrust Review 2011

The Federal Antimonopoly Service (FAS) celebrated a milestone court victory against four of the biggest Russian oil companies accused of abusing the dominant position they hold collectively on the petrol and aviation fuel markets. In fact, just one Supreme Commercial Court decision in the TNK-BP vs.FAS case in May 2010' turned the antitrust cases against Lukoil, Gazpromneft,TNK-BP and Rosneft dating back to 2008 in favour of the FAS.

Abuse of collective dominance
Following this decision, the oil companies reached amicable solutions with the authorities, admitting some antitrust violations and agreeing to sell a significant proportion of oil products on a commodity exchange in return for the fines being reduced to 1% of their annual turnover.

The court tackled the following issues. First, it investigated whether the product boundaries of the wholesale market should include all types of petrol, as the FAS Insisted. The question was whether the wholesale buyers differentiated between different types of petrol, being ready to substitute one for another or not. The court had to determine the geographical borders too. The oil companies are active in all parts of the Russian Federation, this allowing the FAS to claim that the market should be a federal one. The companies tried to split it into several regional markets. The court supported the arguments for a single federal petrol market and the same for kerosene. One immediate outcome was the amount of the turnover fine.

Second, the court supported the arguments that the four oil companies were collectively dominant on this market, as their combined share exceeded 70%, the market share of each of them exceeded 8% and had been relatively stable since 2007, whereas the market itself is characterised by inelastic demand, price transparency and high entrance barriers.

Third, the court analysed whether the price of each producer's oil products was a monopoly high price. The main FAS argument was that the domestic petrol wholesale prices in Russia used to follow world prices upwards, but only went down with considerable delay after a sharp downturn on the world oil markets.

Russian law sets the following two cumulative criteria for monopoly high prices: (a) the price is higher than that on a comparable competitive market; and (b) the price is higher than the costs and the profit necessary for production and marketing. As the petrol market was determined to be a monopolistic market within the Russian Federation, no wonder that a comparable market was not found.The question was whether it would suffice in such a situation to apply the second criterion alone.The Supreme Commercial Court decided it was.

Although the reasoning is not completely new in Russia, it sharpened the criticism of monopoly price analysis. Indeed, it is almost impossible to determine what the necessary costs and profit are. Avoiding the complexity of the analysis, the FAS pointed out that the profit increase outpaced the rise in costs, so the price was unreasonably high.

Finally, the court had to decide whether the difference between the intragroup prices within the vertically integrated oil companies and the prices for independent wholesale purchasers discriminated against the latter. Russian law, as currently interpreted, stipulates that price discrimination constitutes abuse of dominant position even without proof of its impact on competition.

The approach taken by the Supreme Commercial Court increases the risks of the big companies on numerous highly-concentrated Russian markets, especially upstream markets. On the other hand, it shows that antitrust law and its enforcement have become an effective tool of state policy.

Concerted practices

The notion of concerted practices in Russian law is sui generis. It does not require proof of contact between undertakings. It merely requires that each undertaking be aware of the other undertakings' intentions, resulting in a conscious parallelism in action that could only be explained by such knowledge and not by any objective market conditions influencing all the participating entities equally.

In 2010, the courts continued to apply the standard of proof for concerted practices developed in 2008 and 2009.This standard was explained in detail in the previous country review. In a nutshell, prior knowledge of each undertaking of the concerted actions of others can be established not only by provision of information exchange evidence, but simply by the fact that the actions in question are conducted uniformly and simultaneously, without any objective justification for this.This approach has quite often resulted in simple parallelism in actions (e.g., similarity of prices) being accepted as evidence of concerted practices on the market, if the participants fail to justify such uniformity.

Yet there have been isolated cases when a court has provided guidance for distinguishing parallelism from concerted practices. One such case concerned a simultaneous increase in accommodation prices in St. Petersburg for three to five star hotels during the World Economic Forum.5 The FAS insisted that the hotels knew well in advance that their competitors had increased their prices for the period of the international event.The prices became higher than the average seasonal peak price in a number of the hotels.The court disagreed, however, pointing out that (a) the increased demand for the accommodation was a sufficient and objective reason for the price rise; and (b) only some but not all hotels increased their prices, whereas some other competitors did not.The accused hotels did not, therefore, substitute cooperation for competition but simply unilaterally sacrificed competitive price advantage to the possibility of higher profits.The findings of the court were quite new since, first, the law explicitly acknowledges only a long-lasting (not less than one year) increase in demand as an objective reason and, second, the market share of the concerted practices participant is irrelevant under Russian law.

The Federal Antimonopoly Service seems to admit, at least partially, the uncertainty created by the widespread and far-reaching concerted practice notion. In an attempt to curb this, the FAS is expected to suggest an amendment to the law that would allow prior knowledge by each undertaking of the concerted actions of the others to be established only on the basis of information exchange evidence, such as a public announcement made by one of them.

New order on market analysis

The Russian Federal Antimonopoly Service has issued a new Order on Approval of State of Competition Analysis on the Commodity Market. It was the authors' obvious intention to reduce the formalism of the previous act while preserving the highly professional tools for economic analysis of the market.There is a clear effort to develop or at least to explain such concepts as the hypothetical monopolist test and the like and this could be welcomed, given the inadequate enforcement standards in many cases on the ground.

Yet it has not gone unnoticed that the eliminated formalistic requirements (such as a strict hierarchy of analysis methods) were exactly the argument used by lawyers to show the flaws in an Antimonopoly Service case in the court room. It might be speculated, however, that the new Order will gradually make independent market analysis a more efficient tool for combating the authorities' decisions than a simple citation of their formal errors. So far, independent market analysis has been used too rarely in antitrust litigation.

One thing is regrettable, though: while the Antimonopoly Service and the courts try to rely more and more on economic analysis in proving agreements and concerted practices, the Order has undermined the need for market analysis precisely for this category of antitrust case.

The Trade Law

Another development in approach to dominance on the markets was the Law on Trade. Federal Law 'On the Fundamental Principles of State Regulation of Trade in the Russian Federation' (the Trade Law) came into force on February 1, 2010.The Law focuses on state regulation of trade on the food market.

It was passed to curb the long list of contractual practices deemed unfair for domestic food suppliers. The Trade Law has thus restricted payments to retail networks and the maximum periods for payment deferral. In addition, it contains specific antitrust rules for retail networks and food suppliers.They cannot discriminate against one another. Moreover, retail networks with a share exceeding 25% of the overall volume of foodstuffs sold within the boundaries of a specific urban district or municipality may not buy or start up new sales facilities.

Enforcement practice is yet to show the advantages and drawbacks of this new piece of legislation. It is speculated, however, that the outright prohibition on discrimination might be unfortunate, given the straightforward approach to the concept in the current law.The restriction on market share growth for retailers, combined with

the market boundaries strictly following the administrative borders, is said to run counter to analysis and regulation of dominance on the market in antitrust law.

Notes:

Decision of the Supreme Commercial Court of the Russian Federation as of May 25, 2010 case No. 16678/09.
After this article had already been prepared, it emerged that Gazpromneft was not able to reach a settlement agreement with the FAS.The Supreme Commercial Court adjudicating in the Gazpromneft vs. FAS case upheld a fine in the full amount of R4.7bn (ca. US$155m) for 2009 infringements on February 15,201 I. The FAS is understood to put forward new rules for commodity exchange trade with oil products and registration of off-exchange transactions with oil products if the seller is dominant, in order to achieve competitive pricing in 201 I.

Point 4 of the Supreme Commercial Court Decision of 30.06.2008 # 30.

Decision of the Federal Commercial Court for North-West Region of 05.04.2010 case # A56-15062/2009 later upheld by the Supreme Commercial Court.

Order of the FAS of April 28,2010 No. 220 came into effect on September 3, 2010. See, for example, TNK-BP vs. FAS referred to above.

Contact details

For all issues related to publications, news and press releases, please contact:

Ksenia Soboleva

Head of PR and Communications

Subscription

Получайте новости об изменениях в законодательстве с экспертными комментариями наших юристов и обзоры актуальных юридических вопросов в соответствии с теми областями права, которые представляют для вас интерес.