The Dominance and Monopolies Review: Russia
Federal Law No. 135-FZ on Protection of Competition dated 26 July 2006 (the Competition Law) is the main statute applicable to the behaviour of dominant undertakings. Article 5 of the Competition Law contains the definition of dominance, while Article 10 prohibits its abuse. Special rules can be found in Federal Law No. 147-FZ on Natural Monopolies dated 17 August 1995, and in industry-specific legislation, such as Federal Law No. 35-FZ on Electric Power Industry dated 26 March 2003 and Federal Law No. 126-FZ on Communication dated 7 July 2003. Decrees of the government are adopted in furtherance of the statutory provisions; these mainly govern non-discriminatory access to certain markets, goods, services or infrastructure. The Russian competition authority, the Federal Antimonopoly Service (FAS), is in charge of the investigation and enforcement of dominance rules. In addition, the FAS has issued several regulations and guidelines relating to, for instance, market definition, determination of monopolistically high and low prices, assessment of business practices of dominant market players, application of Article 10 of the Competition Law and collective dominance.
Year in review
While abuse of dominance is one of the enforcement priorities of the FAS, the overall number of cases relating to abuse of dominance is generally declining. This reduction is mostly owing to amendments to the Competition Law that introduced a revised definition of abuse of dominance and a widespread use of warnings.
Traditionally, the authority pays particular attention to certain industries of 'social importance': electrical energy and infrastructure (and, more generally, natural monopolies); life sciences; oil and gas; telecommunications; and transportation. Having looked into the activities of Google, Microsoft and Apple, the FAS continues to scrutinise the practices of IT and digital companies. The correlation between intellectual property (IP) and abuse of dominance remains a topical issue in Russia.
Most notably, the FAS uncovered the following prohibited practices: abuse of collective dominance by major Russian mobile operators; anticompetitive conduct of two Russian power supply companies that led to the infringement of consumers' rights (they had to pay for the capacity that was not actually provided in the amount of over 950 million roubles) and ultimately resulted in changes to the operation of the wholesale market; and establishing of discriminatory conditions in the area of gasoline trading by a key oil company (this company complied with the warning issued by the FAS, so no further proceedings were initiated).
Market definition and market power
Further to Article 5 of the Competition Law, dominance is defined as the position of an undertaking or a group of undertakings allowing them to have a decisive influence on the general terms of circulation of goods on a relevant market, eliminate other entities from the relevant market or impede other entities' access to this market. Market share of an undertaking is the cornerstone in the assessment of a dominant position.
The dominance standard is primarily economic. The associated test is discussed in detail in the FAS Guidelines on Application of Article 10 of the Competition Law issued on 7 June 2017. In the meantime, the approach of the authority regarding market definition, which is the essential part of the analysis, is outlined in the FAS Regulations No. 220 on Procedure for Assessment of Competition on the Market dated 28 April 2010 and in the FAS Guidelines No. 17 dated 10 April 2019. Market analysis under the Regulations is necessary in antitrust cases involving abuse of dominance. Since the rules provided for in the Regulations are often rather broad, the FAS often enjoys considerable discretion in defining markets.
As part of the market assessment, the FAS generally conducts its own analysis of an industry, existing suppliers and customers, and specifics of the business. The FAS prepares a questionnaire that covers potential interchangeability of the goods in question, and distributes it to the market players in order to collect information from the inside. Initially, the temporal boundaries are defined. One year (or the period during which the market exists, if it is less than a year), including the time when an infringement took place, constitutes a minimum period of time relevant for the market analysis.
The definition of the relevant product market, which is based on the concept of interchangeability, may turn out to be a rather sensitive issue. The geographical boundaries of a market are normally defined as the territory of the Russian Federation or its regions and municipalities. To assess the geographic boundaries of the market, the FAS identifies the territory within which it is feasible for a customer, from a business and technical perspective, to buy similar products. Other factors that are taken into account by the authority include information on the region, pricing structures and differences in prices throughout the Russian territory, and the structure of goods flow.
The Competition Law applies to both dominant sellers and buyers (naturally, some of the prohibitions are only relevant for dominant suppliers); in certain instances, arguments concerning buyer power are taken into account by the FAS.
As to the market share thresholds, the general rule is that a company is deemed to be dominant if it has a market share of over 50 per cent unless the FAS determines otherwise (presumption of dominance). Under these circumstances, an undertaking is entitled to provide evidence to the contrary suggesting that it does not exercise monopoly power; however, these claims are hardly ever successful.
Further, dominance may be established where a company has a market share of less than 50 per cent. If an undertaking's market share is between 35 and 50 per cent, it can be considered as a dominant entity should the FAS manage to prove it so on the basis of criteria such as:
- the relative stability of its market share;
- its correlation with the market shares of competitors;
- accessibility of the market to new competitors (barriers to market entry); and
- other factors characteristic of the market.
An undertaking with a market share of less than 35 per cent can be viewed as dominant only in a situation of collective dominance or if the thresholds provided for in industry-specific legislation apply.
Special dominance rules are established in respect of:
- telecommunications (a service provider with a market share exceeding 25 per cent is considered as a dominant firm);
- river and sea port service providers (a share of more than 20 per cent within a port);
- electrical energy (as a general rule, if an entity's share of capacity of the generating facilities or share of the generated electrical energy within the boundaries of the free power transfer zone exceed 20 per cent; or if the share of electrical energy or capacity, or both (bought or consumed) within the boundaries of the free power transfer zone exceeds 20 per cent); and
- financial organisations (a financial organisation is dominant if its market share is more than 10 per cent of the only (financial) market in the Russian Federation, or if more than 20 per cent if its products circulate on other markets; and if, within a considerable period of time, its market share has been increasing or always exceeds the above threshold).
The Competition Law rules on unilateral conduct deal with collective dominance. For an undertaking to be considered collectively dominant, the following criteria shall be met:
- the aggregate market share of no more than three market players exceeds 50 per cent; or the aggregate market share of no more than five market players exceeds 70 per cent, while the market share of each undertaking concerned exceeds 8 per cent. Further, their market share must remain stable within an extended period of time (of more than a year);
- there are barriers to market entry for competitors;
- the relevant goods cannot be substituted by other products;
- an increase in prices does not result in a corresponding decrease in demand; and
- the information on the prices and terms of distribution and sale of goods is publicly available.
The situations of collective dominance are dealt with in the FAS Presidium Guidelines No. 15.
The highest fines in FAS history (several billion roubles) were imposed on major Russian oil companies that abused their position of collective dominance in the form of discrimination.
Finally, an undertaking with a revenue of below 400 million roubles cannot be declared dominant if certain conditions set forth by the Competition Law are met (this exemption is mainly relevant for small and medium-sized enterprises rather than undertakings that have substantial market power).
Dominance of a market is, in itself, not an infringement. Under Article 10 of the Competition Law, abuse of dominance is defined through its consequences as acts or omissions of a dominant undertaking that result or may result in the prevention, restriction or elimination of competition; or the infringement of rights of other undertakings in a field of business activities or an unlimited number of consumers; or both (effects-based approach).
The Competition Law provides for a non-exhaustive list of types of unilateral conduct that amount to abuse of dominance and are prohibited per se (i.e., there is no need for the FAS to establish a conduct's adverse effect on competition as such):
- fixing or maintaining monopolistically high or low prices;
- withdrawal of products from circulation if this results in an increase in prices;
- imposing unfavourable contractual terms (or contractual terms unrelated to the subject matter of an agreement) on a counterparty;
- reducing or terminating the production of goods, works or services without an economic or technological justification;
- refusal to deal with certain customers without an economic or technological justification;
- establishing different prices for the same product without an economic or technological justification;
- fixing high or low prices for financial services without any substantiation (for financial institutions);
- establishing discriminatory conditions;
- creating barriers to market entry or exit for other undertakings;
- failure to comply with the regulatory requirements as to pricing; and
- manipulation of prices on the wholesale or retail markets, or both, for electrical energy (capacity).
The FAS is required to prove that an undertaking is a dominant entity and that it has been involved in abusive conduct caught by Article 10. As to the available defences, an undertaking may contest the assessment of its market position as dominant and, as occurs frequently, claim that its behaviour was part of an ordinary business strategy (i.e., competition on the merits), and can be substantiated by commercial and technological reasons. Still, in many cases, the success of these arguments is far from obvious.
More importantly, by statute, an undertaking may provide evidence suggesting that its conduct is admissible only in relation to certain types of abuse (reduction or termination of production, establishing discriminatory conditions and creating barriers to market entry). In particular, potentially abusive conduct may be admissible if it:
- does not eliminate competition on the market;
- does not impose limitations on third parties; or
- results in production improvement, technological progress or increased competitive performance of Russian products, or creates benefits for consumers.
ii Exclusionary abuses
Exclusionary pricing practices, such as predation, fall under the prohibition on establishing monopolistically low prices. There are two main criteria for a price to be qualified as monopolistically low: it is below the necessary production and distribution costs, as well as the profit; and it is below the price that was formed under competitive conditions in a market with a comparable composition of suppliers and customers and conditions of goods circulation. Margin squeeze is not specifically mentioned in the Competition Law, but this type of abusive behaviour can be viewed as creating barriers to market entry (and fixing monopolistically low prices, as in the case of predatory pricing).
Exclusive dealing practices are caught by the prohibitions of Article 10 of the Competition Law if they result in market foreclosure by creating barriers to market entry or refusal to deal with other market players. Loyalty rebates are not prohibited per se, but should always be treated with caution by dominant undertakings, as rebates are usually viewed by the FAS as price components. Establishing such rebates may be considered as abuse of dominance in the form of discrimination or establishing different prices for the same products.
Leveraging practices, including tying and bundling, are prohibited under the Competition Law and are not uncommon in the FAS' practice. For example, the FAS has looked into such practices in relation to the electrical power industry and insurance. Tying and bundling essentially lead to the imposition of unfavourable terms (terms that are not relevant for the subject matter of the agreement) on a counterparty. There are no uniform criteria, so the FAS usually analyses the economic nature of the parties' arrangement to establish, among other things, whether the customer was duly informed and aware of its options.
Refusal to deal
Unjustified refusal to deal is among the most common types of abuse in the FAS' practice (in particular, in the pharmaceutical industry). Special rules apply to natural monopolists and dominant undertakings with a market share of more than 70 per cent to ensure access to certain products and infrastructure. Currently, refusal to license does not expressly fall foul of the Competition Law requirements. Owing to the IP-related exemption, the prohibitions of Article 10 as to abuse of dominance do not apply to the exercise of IP rights, but the relevant legal framework may change in the near future. The overall abolition of this exemption and the subsequent introduction of such mechanisms as compulsory licensing are being considered.
Dominant market players cannot refuse to enter into a contract with certain customers without a reasonable commercial or technological justification (should it be possible to manufacture or supply such products). The following shall be confirmed by the FAS to establish the violation:
- a customer contacted a dominant undertaking and sent a corresponding request;
- a dominant undertaking refused to deal or supply (such a refusal can take different forms; it can be indirect or implied (e.g., by delaying responses or ignoring negotiations));
- a dominant undertaking can (objectively) procure the production or supply of the products; and
- a dominant undertaking does not have any proper commercial or technological grounds to substantiate its refusal to deal.
When reviewing cases on abusive refusal to deal by a dominant undertaking, the FAS has also looked into the potential interplay between the antitrust and anticorruption concerns. According to the FAS, refusal to enter into an agreement with a potential distributor should be based on established facts and decisions of the competent bodies rather than any informal sources (mass media, online publications, phone calls, private investigators, etc.). The FAS is of the opinion that a Russian counterparty is supposed to act in compliance with Russian law, which does not provide for an obligation to undergo a compliance check essentially relating to foreign anticorruption laws (this requirement can also amount to exploitative abuse).
The ability to present evidence and build a well-grounded position is of the outmost importance in such cases. The FAS decides on a case-by-case basis whether there are valid reasons for a dominant undertaking not to deal with a particular distributor. In certain instances, the impracticality and unprofitability of cooperation for a dominant entity were found to be proper and sufficient grounds.
All forms of discrimination, including discriminatory pricing and other issues relating to interactions with counterparties, are prohibited for dominant entities. Thus, customers in the same position should be offered comparable deals, and customers not in the same position should be differentiated on an objective basis according to their divergent circumstances. FAS and court practice suggests that the same pricing policy shall be applied to all counterparties, whether they are part of the same group or not.
As suggested by the FAS' practice, the basic principle here is the following: while the 'freedom of contract' concept still applies, prices and rebates offered by a dominant undertaking shall be substantiated (i.e., based on transparent, objective, clear and well-grounded criteria), and at the same time shall not be discriminatory (e.g., they shall not be drastically different in comparable situations).
Additional rules preventing discrimination can be found in sector-specific legislation, such as Federal Law No. 381-FZ on Fundamentals of State Regulation of Trading Activities in the Russian Federation dated 28 December 2009, which governs relationships between retail food chains and their suppliers and specifically prohibits discrimination (and other forms of abuse).
iv Exploitative abuses
Prohibitions of Article 10 of the Competition Law apply to exploitative abuses. Excessive pricing is assessed in the same way as predatory pricing in terms of the Competition Law provisions preventing dominant undertakings from establishing monopolistically high and low prices. In most cases, other types of exploitative abuse are qualified as imposing unfavourable and excessive terms on counterparties.
Remedies and sanctions
The most common penalties imposed on a dominant undertaking as a result of its abusive conduct are administrative fines of up to 1 million roubles (if the infringement does not result in an adverse effect on competition) or turnover fines of up to 15 per cent of the company's turnover in the market concerned for the preceding year. Company officials may be held liable (and be fined up to 50,000 roubles or disqualified for up to three years). The FAS can only impose administrative fines on offenders; disqualification (a prohibition to hold certain posts or carry out certain activities) can be applied only by a court.
Both mitigating circumstances (e.g., an offender stopped a violation, contributed to an investigation or took certain steps to remedy a violation) and aggravating circumstances (e.g., an offender refused to stop a violation or repeated a violation, or a prohibited practice resulted in damage exceeding 1 million roubles or allowed a dominant firm to generate profit of over 5 million roubles) stipulated in the Code on Administrative Offences are taken into account for the purposes of a fine's calculation and possible reduction.
Alternatively, the FAS is entitled to issue an order requiring an infringer to transfer to the state budget all revenue received as a result of an antitrust violation. It is expressly prohibited to resort to administrative liability (as discussed above) if an offender complied with such an order and transferred the prescribed amount to the budget.
ii Behavioural remedies
Behavioural remedies are clearly preferred by the FAS and are frequently used in practice. The FAS is authorised to issue orders aimed at putting an end to a violation. This is a binding instruction, further to which the undertaking may be obliged to stop its abusive conduct, enter into (amend or terminate) contracts or take other measures to restore competition. Such orders normally describe in detail what actions are expected from a dominant undertaking. Thus, both positive and negative obligations may be imposed on an infringing entity.
In certain instances (particular types of abuse of dominance), the FAS is required to issue a warning (i.e., a specific request to terminate anticompetitive behaviour). If a dominant entity complies with the requirements contained therein within the timeline set forth in the warning, formal proceedings cannot be initiated. Similarly, in this case, a company cannot be held liable for an antitrust violation (i.e., no fines shall be imposed).
This (relatively new) procedure allows the infringing party to deal with the antitrust risks in a relatively straightforward manner; however, it still requires compliance with the terms of a warning. Practically speaking, the number of these cases is rising, so fewer infringements are resulting in investigations. A dominant undertaking will be expected to act, as prescribed in the warning (i.e., enter into an agreement, supply products or ensure a level playing field among its distributors), which may be challenging in practice. In cases of non-compliance, the proceedings continue, and a formal 'case' is initiated.
For completeness, in the most extreme cases, the FAS has a right to invalidate agreements (or certain clauses thereof) through court proceedings.
iii Structural remedies
In accordance with Article 38 of the Competition Law, the FAS may initiate court proceedings aimed at splitting up a dominant undertaking that is engaged in systematic (more than twice in three years) abuse of its dominant position. However, the FAS has never exercised this right and applied structural remedies to dominant entities.
The FAS investigates antitrust violations and determines whether an undertaking holds a dominant position. The FAS investigates and reviews cases of abuse of dominance, conducts inspections and imposes sanctions on offenders. Its officials have a right to access and inspect premises, offices and documents of a legal entity, request and review any documents and information, and interview those involved.
The FAS initiates investigations within its powers and on its own initiative. Information on alleged abuse can be obtained by the authority from different sources, including data from other state bodies, complaints of individuals and legal entities, publications in the media and the results of its own inspections. A commission composed of FAS officials is set up to review a case once initiated. Dominant undertakings and interested parties may participate in the hearings of the above commission, present evidence and give further clarifications.
Cases are supposed to be reviewed within three months, but this initial term may be extended further for up to six months. On average, cases on abuse of dominance are resolved within six months, while in more complex, high-profile cases, the authority may exceed the above time frame, which is not preclusive, and conduct an in-depth analysis that may easily take more than one year.
The Competition Law does not provide for mechanisms such as early resolution. Settlement procedures are not available at the stages of an FAS investigation and a review of the case. An amicable settlement agreement can be entered into with the FAS when a decision of the FAS is appealed in court. A settlement agreement must be approved by the court and is binding on the parties (the dominant entity and the FAS). The settlement implies that the offender is required to acknowledge the violation, while the FAS agrees to reduce the fine. Additional behavioural commitments may be imposed on the dominant firm. From a practical perspective, settlement agreements are viewed as something extraordinary, and are often entered into in high-profile cases (e.g., Google).
FAS decisions can be appealed to the commercial courts within three months of the date of the decision on abuse of dominance. It is possible to appeal decisions of the regional offices of the FAS to the FAS Presidium (within one month of a decision being issued). This internal appeal is allowed in situations where a decision of the regional office is not in line with the FAS' practice and the uniform application of the Competition Law by the authority. If an appeal is filed with the FAS Presidium, then further appeal to court is still allowed, but only within one month. Dominant undertakings usually prefer to challenge FAS decisions; however, FAS decisions stand in courts in the absolute majority (more than 90 per cent) of cases.
Although a private right of action is possible under Russian law, and there have been several successful actions brought by private claimants following abuse by a dominant undertaking, for the time being, private antitrust enforcement does not play a large role. A private action may be initiated before the court by any person whose rights and interests have been violated by an antitrust infringement. General procedural rules apply to the review of private antitrust actions and their funding: legal costs (stamp duty and, within reasonable limits, legal fees) may be recovered from the defeated party.
By way of illustration, a private claimant may seek to have access to the infrastructure of a dominant entity or to enter into a contract with it. Further, actual damages and lost profits can be claimed. For example, in 2015, a dominant pharmaceutical company (Teva Pharmaceutical Industries) was ordered to pay around 408 million roubles in damages (lost profit) to its distributor for refusal to supply.2
Difficulties relating to the calculation of damages (in particular, lost profit) and associated high standards of proof traditionally adhered to by the Russian courts are among the major problems preventing the development of private antitrust actions. There is a clear preference for government enforcement by the FAS; market players are generally reluctant to opt for private enforcement. The FAS is adamant about changing the existing situation: its Guidelines on Proof and Calculation of Damages Resulting from Antitrust Violations shed some light on certain aspects of private litigation.
To obtain damages, a plaintiff is supposed to prove a violation of the Competition Law, the existence of damage (including the amount), and the cause-and-effect relationship between the violation and the inflicted damage. Naturally, an FAS decision establishing a violation is instrumental during the court proceedings, but it does not lower the burden of proof imposed on the plaintiff (as to the amount of damage and the cause–effect relationship). While an FAS decision serves as evidence, the FAS in any case urges future plaintiffs to be more active in collecting and presenting evidence in the course of private antitrust proceedings.
The FAS has always been a proponent of class actions to deal with antitrust matters and has even drawn up several draft laws to this end. Traditionally, the concept of class action existing in common law legal systems has not been known to Russian law; while a general concept of collective (group) action (not specifically aimed at antimonopoly issues) has been modernised, private antitrust litigation remains a complex, somewhat expensive and, therefore, highly unpopular course of action.
The concept of antimonopoly compliance has finally been introduced to the Competition Law. Implementing an antimonopoly compliance system is not compulsory. However, if a company or group of companies decides to implement such a system, it must make sure that the internal documents it adopts to this end include the following: requirements for the assessment of antimonopoly risks within the company; measures aimed at reducing these risks; monitoring measures; the procedure for informing employees of the compliance system; and information about the company's antimonopoly compliance officer.
Companies can apply to FAS to get confirmation that their internal documents on antimonopoly compliance are in line with the legislation. The FAS believes that putting in place antimonopoly compliance will help prevent violations by companies, including dominant entities. At the same time, the new law is silent on whether liability can be mitigated or excluded for violations by companies that have implemented a compliance system cleared with the FAS.
Further amendments to the Competition Law are to be expected in the near future: they may cover such topics as correlation between IP and antitrust regulations and issues relating to the digital economy.
Currently, the prohibitions on abuse of dominance do not apply to conduct associated with the exercise of exclusive rights to IP. Still, fairly recent cases support the FAS' outlook on the interplay between IP and antitrust (dominance): as long as rights holders can benefit from the existing exemption, there is room for abusive conduct (according to the FAS, IP rights should not create any benefits in terms of the circulation of products in the market). The FAS tends to view the above immunity as obsolete; it seeks to exert control over unilateral conduct and contractual arrangements in the area of IP, and to look into existing practices in terms of their compliance with the Competition Law (in particular, in relation to the pharmaceutical industry).
Finally, the FAS seeks to elaborate its approach as to the effect of pricing algorithms, digital platforms and, more generally, use of big data on the market position and associated practices.