17 December 2006
Russia's New Anti-Monopoly Law: A Brief Review
Brian L. Zimbler is a corporate and finance partner in the Moscow and London offices of LeBoeuf Lamb Greene & MacRae. He has spent nearly 20 years working with Russia and the other countries of the former Soviet Union. Kirill Okorochenkov is an associate in the Moscow office, specializing in competition law and litigation matters. Further information is available at www.russianlaws.com.
The following was originally published in the Nov 2006 Russia/Eurasia Executive Guide.
November 26, 2006
RUSSIA'S NEW ANTI-MONOPOLY LAW: A BRIEF REVIEW
by Brian L. Zimbler and Kirill Okorochenkov
LeBoeuf Lamb Greene & MacRae
Russia has adopted a new anti-monopoly law, making some important adjustments in the regime for regulation of competition. The new Law on the Defense of Competition (the "New Law") became effective on October 26, 2006. The New Law is intended to modernize and update Russian competition law, and includes certain new concepts and terminology. It replaces the former Law on Competition and the Restriction of Monopolistic Activity in the Commodity Markets, as amended (the"1991 Law"), except that the definition of the key term "affiliated persons" will still be regulated by the 1991 Law. The 1991 Law was supplemented by a number of regulations adopted by the government body in charge of protecting competition, currently known as the Federal Anti-Monopoly Service ("FAS"); presumably, these will eventually be replaced by corresponding regulations under the New Law. In addition, the New Law governs the financial sector, thus combining the main rules of Russian competition law under a single statute. (However, the following comments will not focus on the provisions of the New Law applicable to banks and financial institutions, which have certain special features. We will review these in a future note.)
The New Law applies to relations "affecting competition on commodities and financial services markets" in the Russian Federation. It seeks to promote fair competition, and to deter monopolistic and other anti-competitive behavior in the distribution of goods and services.
The New Law specifically applies in the event of:
Monopolistic Activities: (i) unfair competition; (ii) abuse of dominant position; (iii) anti-competitive agreements/coordinated actions between/among market participants; (iv) anticompetitive agreements with/acts of governmental authorities; and (v) anti-competitive actions during auctions/tenders;
Economical Concentration on the Market: (i) establishment of business entities; (ii) mergers and acquisitions; (iii) purchasing of shares or participatory interests; (iv) acquiring of "rights to determine business activities" of business entities; and (v) acquisitions of certain fixedand intangible assets;
Selection of Financial Organizations that will provide financial services to state and municipal bodies, as well as to "natural monopolies" such as major utilities; and
Distribution of State Aid.
Extraterritorial Application. An issue that often arises is whether the Russian anti-monopoly rules may be applied to activity outside of Russia. By its terms, the New Law may indeed be applied to transactions occurring in foreign countries, if they affect competition in Russia. Article 3 expressly provides that the New Law applies to agreements between Russian and/or foreign persons or organizations made outside the Russian Federation, provided that the following conditions are met in the aggregate:
the agreements are reached in respect of certain production facilities and/or intangible assets located in Russia, or in respect of shares or participatory interests in Russian business entities or other rights relating to Russian profit-making organizations; and
the agreements lead or can lead to restriction of competition in the Russian Federation.
However, in past practice, there have been very few instances in which FAS (or its predecessor agencies) have sought to apply Russian competition rules to "offshore" transactions. The New Law makes it clear that such application is certainly possible, creating a legal risk. The mechanisms by which FAS would enforce Russian competition laws abroad are not evident: even in Russia, in practice FAS generally must obtain court judgments to enforce its own decisions. Further, Russian court judgments are not generally enforceable in foreign countries, in the absence of bilateral "legal cooperation" treaties providing for mutual recognition of court judgments.There may be further issues regarding whether Article 3 applies to certain agreements prohibited by Article 11 of the New Law (see below), when such agreements are entered into outside of Russia. This issue may arise because Article 3 of the New Law appears to regulate only agreements aimed at the acquisition of control or property rights in Russian legal entities or assets; thus, as drafted, it may not cover anti-competitive actions of market participants as described in Article 11 of the New Law.
2. Key Concepts
The New Law (like the 1991 Law) contains a number of concepts familiar to US and European competition lawyers, and attempts to use these concepts as a basis to promote competition in the Russian market. These include:
(a) Agreements or "Coordinated Actions" Restricting Competition. Article 11 of the New Law prohibits agreements or "coordinated actions" between business entities that restrict competition in certain ways. Under Articles 11.1 and 11.2, such agreements or actions are prohibited if they result or may result in any of the following:
agreements on prices, discounts, premiums or markups (i.e., price-fixing);
increasing and/or cutting prices or maintenance of prices at auctions and tenders;
division of markets into territories, by volume of sales or purchases, by types of goods, or by categories of buyers or sellers;
refusal to enter into contracts with particular sellers or buyers, unless "economically or technologically justified" or permitted by the specified normative acts or court resolutions;
unjustified imposition of certain unfavorable conditions on contract parties, including "tying" the sale of one product with other products;
discrimination in pricing for the same product, unless "economically or technologically justified";
terminating or reducing production despite profitable conditions;
blocking access to or exit from the market;
establishing conditions for membership in professional or other organizations that may restrict competition; or
(under Article 11.2) "any other" agreements or coordinated actions that restrict or may restrict competition (a "sweeper" provision), except for certain vertical agreements, which are exempted under Article 12 of the New Law.
Except for the "sweeper" clause provided in Article 11.2, and those cases where economical or technological justification is available or other specified exceptions exist, the above actions or arrangements are per se illegal, without the need to show any effect on competition.
Article 13.1 of the New Law provides an exemption from the "sweeper" clause ("any other" practices that restrict competition) under certain circumstances, including where the action in question provides benefits to consumers; and in this case advance clearance is available. (See item (e) below.)
Further, Article 11.3 of the New Law prohibits coordination of commercial activity of companies that results or may result in the restriction of competition. Although the implication of this provision is not entirely clear, it may apply, for example, if a company manages a number of Russian legal entities in a way that restricts competition.
(b) Vertical Agreements. Under Article 12 of the New Law, there are further exemptions from Article 11 for (a) vertical franchising agreements, and (b) agreements between business entities where each has an individual market share of less than 20%. However, although the text of the New Law is not very clear on this point, it appears that these exemptions only apply to agreements falling within the "sweeper" provision in Article 11.2 - i.e., "any other" agreements or coordinated actions that restrict or may restrict competition.
(c) Abuse of Dominant Position. Under Article 10.1 of the New Law, business entities are prohibited from using a "dominant position" in a market  to restrict or harm competition. The following actions by dominant market participants are expressly forbidden:
setting up and maintaining "monopoly high" or "monopoly low" prices;
withholding goods from circulation resulting in price increases;
imposing certain unfavorable conditions on contract parties, including "tying" the sale of one product with other products, unless "economically or technologically justified" and/or permitted by the specified normative acts or court resolutions;
terminating or reducing production despite profitable conditions, unless "economically or technologically justified" or permitted by the specified normative acts or court resolutions;
refusal to enter into contracts for provision of goods or services under certain circumstances, unless "economically or technologically justified" or permitted by the specified normative acts or court resolutions;
discrimination in pricing for the same product, unless "economically or technologically justified" or provided by law;
setting up of unjustified high or low prices by a financial organization;
creation of discriminating conditions;
blocking access to or exit from the market; or
violation of procedures for setting prices as established by law.
These actions are per se illegal if conducted by a participant with a dominant position. However, in certain cases, there is an exception if such action is justified by "economic or technological circumstances,"  or specifically allowed by normative acts or court resolutions.
Article 10.4 also provides an exception for intellectual property licensing activities. However, we believe that this exception is merely intended to confirm that intellectual property owners may enter into exclusive licensing arrangements, and does not necessarily exempt them from all other prohibited activities. In any case, the exception only applies to "dominant" participants, since it relates only to Article 10.
This raises the issue of who qualifies as a "dominant participant." Article 5 of the New Law states that unless otherwise demonstrated, a business entity with more than 50% market share is presumed dominant; and less than 35% market share is generally not dominant. However, a group of up to three market leaders may be deemed dominant if they have aggregate market share of 50%; and the same applies to a group of up to five market leaders with aggregate market share of 70% (unless one of them has a market share below 8%).
Accordingly, if a business entity is found to be dominant, it is required to abstain from the "abusive" practices listed in Article 10.1. However, Article 10.2 provides an exception for certain prohibited practices if they can be shown to meet certain tests (such as providing other benefits to consumers) under Article 13.1 of the New Law - see immediately below.
(d) Exceptions if Benefits Can Be Demonstrated. Pursuant to Article 13.1 of the New Law, certain practices that are otherwise prohibited under Articles 10 and 11 may nonetheless be "recognized as permissible" if they:
"do not create the possibility for certain participants to eliminate competition,"
do not impose restrictions on market participants that are "unrelated to the main purposes" of the practices, and
where they result or may result in:
improvements in production and/or sales of goods, stimulation of technical and/or economic progress, or increased competitiveness for Russian-manufactured goods in world markets; or
benefits to consumers that are comparable to the benefits received by the business entities involved.
Generally, the intent of these provisions appears to be that where certain activities or agreements do not directly harm competition, and generate countervailing benefits for the economy or consumers, then they should be allowed. Unfortunately, the drafting of the text in this Article of the New Law is particularly unclear, making it difficult to interpret what concrete facts or circumstances are contemplated.
It appears that the applicability of this exemption can be confirmed by "advance clearance" from FAS. (See item (e) below.) Certain specific exemptions and "general clearances" may also be granted by the Russian Government, under Article 13.2 of the New Law.
(e) Procedure for "Clearing" Agreements. Article 35 of the Law sets forth a procedure by which FAS may "clear" agreements that would otherwise be prohibited as restricting competition. In essence, the applicant submits a draft of the agreement to FAS together with other relevant information. FAS is supposed to respond within 30 days, although extension of this period is possible for purposes of further review and investigation. If the decision is positive, then the agreement may be entered into within one year. However, FAS is entitled to impose conditions on the applicant in connection with the decision, to "protect competition."
(f) Merger Control. A separate set of provisions in the New Law addresses the subject of "merger control," or FAS approval for certain M&A transactions. In brief, under Articles 27-30 of the New Law, the new rules require the prior approval of FAS in the following cases:
establishment of business entities;
mergers and accessions;
direct "acquisition of shares" in Russian companies if the acquirer obtains more than 25%, 50% or 75% direct voting control of a Russian stock company, or gains 1/3, 50% or 2/3 of the voting power of a Russian limited liability company;
acquiring "rights to determine business activities" of business entities; or
acquisition of a title to, or use of, more than 20% of the fixed and/or intangible assets of a business entity. In other cases, only notification of a transaction to FAS is required. These new rules for acquisitions replace the old, familiar 20% voting threshold under the 1991 Law, and are intended to simplify regulation of Russian M&A transactions. Thus, unlike under the old 1991 Law, separate FAS approval will no longer be needed if an investor increases its ownership of voting shares from 21% to 22%. However, prior approval will still be required if the ownership increases above 25% or the other indicated limits.Pursuant to Articles 27-28 of the New Law, such prior approval of FAS is only required where the parties to the transaction exceed certain minimum size requirements. These vary for different categories of transactions, and generally depend on either the aggregate assets or the annual commercial revenue of the parties to the transaction, their “group of persons” and the target company. In most cases, the test is met if the transaction involves a legal entity listed in the special state register, maintained by FAS, of entities having a market share above 35%.
New Exception for Intra-Group Transfers. There is one important exception to the prior approval requirements, as established by Article 31 of the New Law. Where the transaction is entered into between members of the same group, only post-closing notification to FAS is required. However, the following conditions must be met:
Violations of Russian competition law may result in the imposition of civil liability, or financial, "administrative" and/or criminal penalties.
A brief summary follows:
(a) Actions by FAS. Under Article 39 of the New Law, a variety of persons (any individual or legal entity, a governmental executive body, a prosecutor, or FAS itself) may request an investigation of an alleged violation. If the relevant antimonopoly authority (the federal headquarters of FAS or one of its territorial branches) determines that the facts alleged would constitute a violation, it establishes a special commission (the "Commission") to conduct an investigation. A copy of the resolution must be forwarded to the alleged violator. The Commission may use various sources of information during the investigation, including documentary evidence, expert opinions and testimony provided by the target of the investigation and other persons. It may also use information submitted in connection with required notifications or applications for approval, data received from Russian government agencies, statistical data, market surveys, customer inquiries and information generated by research institutes. Further, FAS may request information directly from the entity under investigation, and typically does so without disclosing the reason for the request. The alleged violator is obligated to provide the information requested. If the Commission determines that a violation has occurred, it may issue either:
an order to stop the violation, in which FAS prescribes specific actions to be taken by the violator, and a fixed deadline for doing so; or
a decision to impose fines and penalties.
(b) Private Cause of Action. In theory, a private person may bring an action to enforce Russian antimonopoly legislation, and may claim damages from the alleged violator. However, such cases are rare in current practice.
(c) Break-up. Under Article 38 of the New Law, in certain circumstances where a dominant participant is engaged in "systematic" monopolistic behavior, FAS may apply to the Russian courts for an order to break up the violating entity. Such cases are rare.
(d) Financial Penalties. Under Article 51.3 of the New Law, FAS may impose financial penalties on a business entity, in an amount equal to the income received from the infringing activity. This penalty mainly applies to abuse of a dominant position by a legal entity, unfair competition and anti-competitive agreements between/among business entities. Although there is no clear indication to that effect in the New Law, it can be argued that this penalty should not be applied in cases of violation of the "merger control" rules.
(e) Administrative Fines. A separate category of rules under the Russian Code of Administrative Violations would also allow FAS to impose monetary penalties for violations of antimonopoly laws. For example, if a business entity fails to comply with "merger control" rules of Articles 27-30 of the New Law or FAS orders, FAS may impose "administrative" fines, as follows:
up to 5,000 times the statutory monthly minimum wage (approximately USD 18,700 at current minimum wage and exchange rates), payable by the entity itself; and/or
up to 100 times the statutory monthly minimum wage (approximately USD 370), payable by the executive officers (such as the CEO) of the entity. In addition, executive officers of the entity may be banned from serving in similar positions for up to three years.
(f) Invalidation of Transactions. Under Article 34 of the New Law, if an acquirer has acted in violation of the "merger control" rules and acquired, for example, shares (or obtained indirect control) without obtaining the prior consent of FAS, the transaction may be invalidated by court proceedings initiated by FAS, provided that such transaction has led or may lead to the restriction of competition. An example of the latter would occur if the transaction causes the "emergence or strengthening of a dominant position" in the relevant market.
(g) Criminal Liability. The Russian Criminal Code imposes potential criminal liability upon the executive officers of a business entity found to be in violation of antimonopoly legislation. Liability will apply if a court finds that the individual’s conduct adversely affected competition:
by fixing and maintaining monopolistically high or low prices; or (ii) through division of the market, setting of entry barriers or removal of existing market participants; provided, that the amount of damage caused must exceed 1 million rubles (approximately USD 35,500). Penalties may include fines up to 200,000 rubles (approximately USD 7,000), or up to 18 months’ income of the individual in question; or imprisonment for up to two years. More severe penalties may be imposed for repeat offenses or in cases of "aggravating circumstances."
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We hope that the above comments will provide a useful summary of the New Law. As should be evident from our discussion, the New Law is unclear in a number of respects, thus creating uncertainty in predicting how it should be interpreted and applied. Practice – and perhaps, new implementing regulations – will be required to clarify these matters.
Further information is available at www.russianlaws.com.
LeBoeuf, Lamb, Greene & MacRae
Nikitsky Pereulok, 5
 Law No. 135-FZ, dated 26 July 2006, published on 27 July 2006.
 Previously, competition in the financial sector was separately governed by Law No. 117-FZ, dated 23 June 1999 (as amended), On Protection of Competition in the Financial Markets.
 Under Article 8 of the New Law, it appears that such actions must be of benefit to all participants provided that such actions are known to all of them in advance and must have been caused by actions of other business entities ("hozyastvuyuschiy sub'ekt") and not by circumstances beyond the participants' control.
 It is unclear how it can be confirmed when such justification applies, since it appears not to be available for the "advance clearance" procedure under Article 13.1.
 This interpretation is based on a combined reading of Articles 11.2 and 12. Read separately, Article 12 would appear to apply to all types of agreements.
 Similar to US or EU legislation, a "market" may be defined by reference to a good or service, and may be regional or national. The notion of a market for particular goods, including substitute goods, is addressed in Article 4.4 of the New Law. Under the 1991 Law, FAS developed detailed regulations for analyzing goods and determining markets and market share. It will be interesting to see if these regulations will change under the New Law.
 Specifically, items 3 through 6 listed in Article 10.1: (3) imposing unfavorable conditions on contract parties, including "tying" the sale of one product with other products, (4) terminating or reducing production despite profitable conditions, (5) refusal to provide goods or services under certain circumstances, or (6) discrimination in pricing for the same product.
 The text states that "the requirements of this Article  do not apply to activities for the exercise of exclusive rights" to intellectual property or equivalent means of distinguishing companies, goods or services [emphasis added].
 In other words, each of these business entities must have individual market shares higher than any of their competitors.
 Article 5.3 of the New Law. Certain other conditions must also be met for the "dominant" label to apply.
 This exception applies to items (4), (8) and (9) of Article 10.1 - (4) terminating or reducing production in certain circumstances, where not justified by "economic or technological circumstances," (8) discrimination in contract terms, and (9) blocking access to or exit from the market.
 The items listed in footnote 11, plus any "any other" practices that restrict competition (under the "sweeper" clause in Article 11.2).
 Presumably, these are based on the concept of block exemptions under EU competition law. They may apply to "any other" practices covered by the "sweeper" provision in Article 11.2.
 Presumably, this applies to those items in Articles 10.1 and 11.2 of the New Law that are identified as being subject to possible exemption under Article 13.1. See footnotes 11 and 12 above.
 Article 35.2 of the New Law indicates that FAS is to adopt regulations to confirm the required list of documents and information.
 Article 35.7 of the New Law.
 This requirement is triggered only where the charter capital of the newly established business entity is paid by either the specified percentage of shares/participatory interest or assets (provided that the book value of such assets exceeds 20% of the total book value of assets of such business entity) of another business entity.
 Under Article 1(16) of the New Law, the "acquisition of stocks (shares) of economic companies" is defined to include "the purchase, as well as gaining any other opportunity to exercise the right of vote granted by stocks (shares) of economic companies on the basis of contracts of property trust management, contracts of joint activity, contracts of agency and other transactions or on other different grounds."
 This requirement is not entirely clear, and the equivalent provision under the 1991 Law generated controversy in the past. Under Article 28.1(8) of the New Law, we understand that the prior approval requirement applies to the acquisition of "rights to determine . . business activities or to exercise the functions of the executive body" of a company, including "on the basis of a trust agreement, joint activity or agency contract." Thus, in our view, the language of Article 28.1(8) of the New Law is intended to include all forms of acquiring management control. For example, the acquisition of control may occur through the purchase of a foreign shareholder which in turn owns 51% of the Russian company; or through an agreement - such as a Shareholders Agreement – which gives one party effective management control, or even certain features of control (such as a right to appoint the chief executive officer, a majority of members to the Board of Directors, etc.)
 We do not list the cases requiring notification here.
 Generally, the aggregate assets should be in excess of 3 bln. rubles, or approximately US$112 mln. at present.
 Generally, the annual commercial revenue should be in excess of 6 bln. rubles, or approximately US$224 mln. at present.
 In certain cases the New Law calls for measuring both specified parameters.
 Under the 1991 Law, even many insignificant intra-group transactions required prior FAS clearance if they met the statutory thresholds.
 Pursuant to Art. 23 of the New Law, in the event of exercising the state control over economic concentration, FAS has the right to make orders, which may require inter alia: to make contracts, to change the terms and conditions of contracts or to dissolve contracts.
 A recent case in which FAS sought the break-up of Eurocement cement group, which was alleged to be imposing monopoly prices, resulted in a settlement.
 This reasoning is based on our combined reading of Articles 4(10), 51.3 and Chapter 2 of the New Law.
 These are imposed under Articles 19.5(2) and 19.8 of the Code of Administrative Violations. Administrative liability is considered a separate category under Russian law.
 This is a vague standard the notion of which is for the first time introduced by the New Law. The wording of Article 4(17) of the New Law may suggest that even ordinary acquisition of control by one group of another group may lead to restriction of competition.
 Under Russian criminal law, only individuals may be subject to liability - not legal entities.