Competition- Russia

The Duma (the lower chamber of the Russian Parliament) has been discussing amendments to the Administrative Code on stricter penalties for violations of the Anti-monopoly Law since mid-2006. However, the move towards new legislation finally gathered pace in March 2007 when a final draft of the changes was passed by the Duma, approved by the Council of the Federation and signed by President Vladimir Putin. The amendments to the code will come into effect on May 9 2007 and will reinforce the measures set out in the Law on the Protection of Competition.

The provisions on penalties and payment procedures have changed substantially since the original draft was first considered by the deputies in November 2006. Penalties were to have been set at between 0.5% and 4% of the company's turnover for the year preceding the violation, depending on the type of violation. After long discussions it was agreed that penalties will be equal to between 1% and 15% of the profits from sales of the product in the market in which the violation took place. The penalty will be calculated on the basis of the sales in the calendar year preceding the violation. If the offending party did not conduct such activity in the preceding calendar year, the calculation period will be the current year up to the date on which the violation was detected.

This calculation method is more appropriate because: (i) calculating penalties on the basis of turnover - which takes account of profits before tax - is seen as a less fair reflection of the entities' economic activities than a calculation on the basis of net profit; and (ii) the term 'proceeds of sales' is defined in the Tax Code, whereas 'turnover' is not, which makes it more logical to calculate the former under Articles 248 and 249 of the code.

Russian businesses should have foreseen the increase in penalty thresholds. Large penalties are a consequence of the creation of a strict penalty system and the application of current anti-monopoly policy to companies which have seemingly unlimited profits and opportunities. Business leaders and the Federal Anti-monopoly Service agree that market participants should not be able to plead ignorance of the law.

Before the Administrative Code was amended, penalties applied in the event of:

failure to implement the service's rules or decisions;

failure to submit applications or comply with notices; and

the submission of false or late information.

The maximum penalty for legal entities at present is 5,000 times the minimum monthly wage. This level of fine clearly cannot be an effective, binding measure for all participants in all markets.

However, even taking into account the brevity of the existing anti-monopoly legislation and the moderate penalties now enforced, the most common consequence of a legislative violation is an order from the service to cease the offending activity. At this point, main market participants with substantial assets have no motivation to correct their actions or adopt a fairer approach to the activity in question.

The draft technical solution is to determine the competing entities' violations and impose varied penalties on them. Article 14 of the code, which includes a list of administrative violations committed by businesses and regulates the corresponding penalties, has been amended in respect of certain violations, such as abuse of dominant position, participation in concerted practices and other forms of unfair competition. The penalties prescribed for such violations lend weight to the service's statement that ignorance of its anti-monopoly rules will result in considerable fines.

If the amendments had been in force in the past few months, the fines imposed in recent cases would have amounted to millions of dollars, rather than the more typical penalty of around Rb1 million - the former figure is close to European standards. However, the total penalty is capped at 4% of the entity's total annual sales profit. The difference between this figure and the profit from sales in the market in which the violation took place may be insignificant, in which case it would be reasonable to calculate the penalty according to the 4% limit in order to avoid a disproportionately large penalty.

The aim of bringing the Russian anti-monopoly system closer to the standards of the European markets is demonstrated by the decision to offer an amnesty to parties which declare their participation in activities or agreements which restrict competition. However, it is unclear from the draft whether the amnesty applies to businesses alone or includes individual managers.

If an admission on the part of officials representing entities which apply for leniency does not secure relief from personal liability or disqualification, submitting an admission of anti-competitive behaviour on behalf of a company will jeopardize managers' professional interests and make it less likely that they will come forward. However, the power to disqualify individuals on the basis of their participation in concerted practices or other unfair activity is a significant aspect of developing European methods of reviewing transactional structures.

It is acknowledged that, before a contract is agreed, the structure of a transaction must be reviewed by legal consultants, who will determine the need for certain legal procedures in respect of the transaction. Unfortunately, senior managers set the need for compliance with anti-monopoly rules against the need to manage the company's time and resources. The real possibility of losing the right to sit on a board of directors, for example, would surely change managers' attitudes and make it standard practice for legal opinions and recommendations on competition law compliance to be taken into account and thoroughly implemented throughout a project.

The legislature's main aim is to establish a list of violations and indicate the corresponding penalties. However, the effectiveness of anti-monopoly regulation relates directly on the likelihood of the penalty being enforced - this question goes beyond the framework of competition law and depends on the transparency of the state authorities. The size of the penalties, the perception that they are inevitable and a simple calculation of the preferable consequences of compliance over ignorance should encourage businesses to submit information to the anti-monopoly authorities voluntarily. However, the effectiveness of the amendments will depend on when and how the new measures are applied.

International Law Office