1

Competition and Competition Policy in the Russian Federation

DGLN WorkshopMay 31, 2011

2

Plan of the presentation

1. Overview of implications2. Comparison of Performance and Competition in

Russia

3. Factors affecting competition levels within Russia4. Characteristics of Competition and Regulatory

Conditions in Selected Russian Sectors5. Competition Policy in Action: The Australian

Experience

3

Economy-wide interventionsTopic Recommendations Expected Impact

State aid and preferential treatments

Broaden the mandate on state aids regulation in order to – diminish state aid to particular firms and sectors.

Eliminate preferential treatments to state or municipality-owned corporations.

Create an inventory of state aid by beneficiary and evaluate distortions of competition of state aid (including tax arrears).

Level the playing field. Reduce favoritism and increase transparency.

Potential collusive behavior and discretion in tender process

Guaranteeing open and efficient tender process and reducing possibilities of collusion by introducing Certificates of Independent Bidding Determination and prohibitions to contract and participate in public procurement if a firm has participate in a cartel.

Reduce possibilities of collusion and corruption.

Reduce the cost of doing business in public procurement

Spillover effect: Construction Sector

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Sector- specific interventionsTopic Recommendations Expected Impact

Self-regulations of business associations

Provide specific prohibitions towards self-regulations that facilitate price-fixing and limit entry,

Increase entry and reduce prices of services

Transport Eliminate price controls and government involvement in competitive sectors.

Reduce direct participation of the state in the provision of goods

Increase competition

Construction Provide a unified database of land plots with complete information about ownership and usage status or potential restrictions on future use.

Streamline the processes for registration, obtaining construction permits, and licensing schemes for each segment of the supply chain.

Review the impact on competition of the requirement that certain construction firms must have prior experience for similar, large scale projects before they could bid for a new contract.

Limit the benefits of informal relationships with local officials, currently possessed by certain construction firms

Increases incentives for entry and increases the number of participants.

5

(II)Comparison of Performance and Competition of the Russian Federation: How does Russia compare to other economies in the region?

6

Even though significant progress has been made in the last few years, Russia still lags behind ECA countries in the intensity of market competition.

Russia

ItalyGree

ce

Finlan

d

Portugal

Slove

nia

Hungary

Poland

Switze

rland

Slova

kia

Estonia

Norway

Spain

Denmark

France

Turke

y

Czech Rep

.

Austria

Belgium

German

y0

1

2

3

4

5

6

7

Intensity of local market competition

Portugal

RussiaGree

ce

Hungary

Slove

niaTu

rkey

Poland

Estonia

Slova

kiaSp

ain

Finlan

dFra

nce

Norway Ita

ly

Czech Rep

.

Denmark

Austria

Belgium

Switze

rland

German

y0

1

2

3

4

5

6

7

Extent of market dominance

7

The regulatory environment in Russia is also restrictive. State control is extensive…

0

0.5

1

1.5

2

2.5

3

3.53.094

Mean = 1.54

Product Market Regulation (2008)Index scale of 0-6 from least to most

restrictive

Russ

ian

Fede

ratio

nGr

eece

Turk

eyPo

land

Port

ugal

Slov

enia

Fran

ceBe

lgiu

mLu

xem

bour

gCz

ech

Repu

blic

Swed

enIta

lySw

itzer

land

Aust

riaEs

toni

aGe

rman

yHu

ngar

yNo

rway

Finl

and

Neth

erla

nds

Spai

nSl

ovak

Rep

ublic

Denm

ark0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

54.39

Mean = 2.41

State Control (2008)Index scale of 0-6 from least to most

restrictive

8

…and there are high barriers to trade and investment.

Turke

yGree

ce

Hungary

Czech Rep

ublic

Belgium

Finlan

dFra

nce

Norway

Switze

rland

Denmark Ita

ly

Netherl

ands

0

0.5

1

1.5

2

2.5

3

1.78 Mean= 1.43

Barriers to Entrepreneurship (2008)Index scale of 0-6 from least to most re-

strictive

0

0.5

1

1.5

2

2.5

3

3.53.11

Mean=0.77

Barriers to Trade and Investment (2008)Index scale of 0-6 from least to most re-

strictive

9

The World Bank’s Trade Restrictiveness Index also ranks Russia’s trade policies as highly restrictive.

-

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20

0.16

Mean = .06

Over All Trade Restric-tiveness Index

Index Scale 0 -1 ( 1 Most Restrictive)

-

0.05

0.10

0.15

0.20

0.25

0.15

Mean = .05

Mfg. Trade Restrictiveness Index

Index Scale 0-1 (1 Most Restrictive)

Norway

Kazakh

stanRussi

aTu

rkeyChile

Ukraine

Macedonia

Moldova

Armen

ia

Georgi

a

Azerbaija

n

Kyrgyz

Rep -

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.25 Mean=.16

Agri Trade Restrictiveness Index

Index Scale 0 -1 (1 Most Restrictive)

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Prices for selected consumer products are higher than comparable prices in other countries within the region, controlling for GDP per capita, time effects and trade costs

• Empirical results for the period January 2005-July 2010 indicate that, on average, prices in Russia are approximately 20% higher than CIS counterparts.

• Differences in GDP per capita and import costs do not capture the difference in the level of prices.

• Countries with larger GDP per capita and higher import costs are associated with a higher price level in the economy for the products under analysis.

• Russian firms’ exhibit higher levels of price-cost margins compare to firms in the Region in manufacturing sectors.

0.5

11.

5D

ensi

ty

0 .2 .4 .6 .8 1pcm2

0 1

Russia=1, Selected ECA countries=0

11

Russian firms’ register larger PCMs compared to the average of the region in every manufacturing sector except for food, garments and chemicals.

100.0

175.5

0.0

50.0

100.0

150.0

200.0

250.0

Other manufacturing

Average158.9

264.4

0.050.0

100.0150.0200.0250.0300.0350.0400.0450.0500.0

Esto

nia

Lith

uani

a

Serb

ia

Czec

h Re

publ

ic

Pola

nd

Rom

ania

FYRO

M

Kaza

khst

an

Turk

ey

Latv

ia

Russ

ia

Hung

ary

Bela

rus

Bulg

aria

Bosn

ia

Slov

akia

Textiles

Average

100.0

899.8

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0Electronics

Average

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(III)Factors affecting competition levels within Russia

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Compared to Moscow city, price variation across Russian regions is substantial after controlling for both GRP per capita and distance.

Moscow City

Ivanovo

Voronezh

Lipetsk

Belgorod

Tambov

Khabaro

vsk

Magadan JA

R

Ossetia

Karach

ayKomi

Vologda

Pskov

AltaiRep

Tomsk

Irkutsk

Omsk

Astrakh

an

Sverd

lovsk

Yamalo

Nizhni

Perm

Tatarst

an

Udmurt

Orenburg

30%

50%

70%

90%

110%

130%

North Caucasus

Central Far East-ern

Volga

Northwestern Southern UralSiberia

Price variation is also product-specific and varies among regions, suggesting that price levels are influenced by local conditions beyond the level of GRP per capita, population and distance from main markets.

Price variation among regions for selected products

*adjusted for GRP per capita, distance to district center, average household consumption, and time fixed effects

Chukotka

TransBaik

alAmur

Tyumen

Arkhan

gelsk

Krasnoya

rsk

Moscow

Karachay

Ivanovo

Mordovia Tu

va

Astrak

han

VoronezhKalu

ga

Dagest

an

Smolen

sk

Bryansk

0%

50%

100%

150%

200%

250%

Product: GasolineSector: Other

SakhalinSak

ha

Khanty

Sverd

lovsk

Vladim

ir

Irkutsk

Krasnodar Tve

r

Orenburg

Kaluga

Kurgan

Kabard

ino

Mordovia

Voronezh

Tatars

tanNizh

ni

Adygea

0%

20%

40%

60%

80%

100%

120%

140%

160%

Product: Mobile Connection FeesSector: Communication

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Firm qualities differ in sectors with higher PCM in Russia

• Firms in sectors where Russia registers higher PCMS than regional counterparts tend to be:– older– larger in size– less likely to export– Invest less in R&D– more likely to operate in

local markets– (in some cases) less likely

to operate in a competitive market structure

Average PCM

Average Size

Average R&D intensity

Fragmented 0.46    

High Differentiated 0.50chemicals 0.38plastics & rubber 0.52 53.5 1.8%fabricated metal products 0.48 60.7 1.9%

Low Differentiated 0.40textiles 0.46 22.0 0.5%garments 0.35 70.3 0.5%

Segmented 0.48    

High Differentiated 0.49machinery and equipment 0.44 151.2 3.4%electronics 0.59 226.2 1.5%

Low Differentiated 0.48other manufacturing 0.48 134.9 0.3%food 0.42 139.4 0.5%non metallic mineral products 0.50 231.8 0.5%basic metals 0.49 1072.9 0.4%

Breakdown of manufacturing sectors according to market structure characteristics in Russia,#

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The analysis of market structure within Russia at the geographic and product market level also reveals a high degree of concentration.

IngushetiaTransBaikalMoscowCity

AltaiRepKabardinoKemerovo

AdygeaIrkutsk

ArkhangelskNovgorod

ChelyabinskBelgorod

AltaiMagadanSmolensk

KhantyTver

PermPenzaKursk

Kaliningrad

0 100 200 300 400 500 600 700

Number of dominant firms in regional markets

Source: Register of Dominant Firms – FAS

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…which varies by region and sector

Source: Spark

MoscowSaint-Petersburg

Tver oblastPerm Krai

Rostov oblastVoronezh oblast

TatarstanIrkutsk oblastTomsk oblast

Karelia

0 2000 4000 6000 8000 10000

Textiles

Unconcentrated: <1500

Highly concentrated :

1500-2500

Moderately concentrated: 1500-2500

Unconcentrated: <1500

Highly concentrated :

1500-2500

Moderately concentrated: 1500-2500

MoscowSaint-Petersburg

Rostov oblastVoronezh oblast

Perm KraiTomsk oblast

Tver oblastTatarstan

Irkutsk oblast

0 2000 4000 6000 8000 10000

Electronics

Unconcentrated: <1500

Highly concentrated :

1500-2500

Moderately concentrated: 1500-2500

MoscowSaint-Petersburg

Perm KraiIrkutsk oblastTomsk oblast

Tver oblastVoronezh oblast

Rostov oblastTatarstan

Karelia

0 2000 4000 6000 8000 10000

Plastic and Rubber

Unconcentrated: <1500

Moderately concentrated: 1500-2500

HHI – concentration index

HHI – concentration index

HHI – concentration index

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State control and government participation

• State ownership in Russia appears to be twice as large as in the EU-10 countries and state-owned enterprises command about 17% of the employment

• National, state, or provincial government controls at least one firm in 16 economic sectors

• State ownership is pronounced in infrastructure/network industries• Even though privatization of state-run companies is in the

government’s agenda, the government still controls the largest producers in many key sectors

• Meanwhile, the government’s dominance on the above industries is likely to continue given the existing barriers to trade and investment

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Government actions limiting competition (I)An analysis of State aid and preferences data indicates that the use of aid by regional authorities varies widely across Russian regions.

Tyumen

Irkutsk

Sverdlovsk

Murmansk

Kursk

Tatarstan

Tula

Khanty Mansiy

sk

YamaloTomsk

Kaluga

Moscow

Voronezh0

10

20

30

40

50

60No. of Property State Aid Application

Approved (2008)

Approved Conditional Approval

Source: FASSource: FTS

10% 20% 30% 40% 50% 60% 70% More0

5

10

15

20

25

30

35

Distribution of Tax Arrears by Regionas a % of tax revenues

Num

ber o

f reg

ions

20

Government actions limiting competition (II)

Khanty-Mansi Autonomous OkrugYamalo-Nenets Autonomous Okrug

Sverdlovsk OblastSakha Republic

Khabarovsk KraiVolgograd Oblast

Rostov OblastLeningrad OblastSaint Petersburg

Kaliningrad OblastRepublic of KareliaMurmansk Oblast

Kaluga OblastMoscow

Yaroslavl OblastTver Oblast

Moscow OblastVoronezh Oblast

Tomsk OblastOmsk Oblast

Irkutsk OblastNovosibirsk Oblast

Kemerovo OblastRepublic of Tatarstan

Perm KraiSamara Oblast

Penza OblastUlyanovsk Oblast

Republic of MordoviaStavropol Krai

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Tax Arrears in Selected Regions% tax revenues - 2010

North Caucasian District

Siberian District

Central District

North Western District

South Dis-trict

Far East Dis-trictUral Dis-trict

Volga District

Source: FTS

Tobacco Products

Oil Refinary

Mining

Hotels and restaurants

Transport

Real Estate

Metals and Fabricated Metal Products

Electricity, Gas and Water

Electrical and Optical Equipment

Manufacturing

Food and Beverages

Finance

Machinery Equipment

Construction

Retail and Wholesale Trade

Agriculture, Forestry, Hunting

0% 10% 20% 30% 40% 50%

Distribution of Tax Arrears by Industryas a % of tax revenue

2011

Government actions limiting competition (III)

Source: FASPrivate cases include cases initiated under articles 10 and 11; Government cases include cases initiated under articles 15 and 16

• Actions of government bodies at the regional level also influence competition conditions in domestic markets.

• In the case of procurement and tender processes, the FAS detected that 60% of the violations for the period 2008-2009 were conducted at the regional and municipal level

• Anticompetitive practices in tendering processes have been targeted to foreclosure of new entrants and participants to the biddings

Irkutsk

Karachay-C

herkessi

a

Adygei

Novosib

irsk

Bryansk

Smolensk

KemerovoRosto

v

Lipetsk

Murmansk

Stavro

pol

Chelyabinsk

OmskYaku

t0%

10%20%30%40%50%60%70%80%90%

100%

Competition Cases 2009 – Anti-competitive Actions of Govern-

ment vs. Anticompetitive Practices

Total cases: Actions GovTotal Cases: Abuse and Private Agreements

Government actions - av-erage RF: 51%

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(IV)Characteristics of Competition and Regulatory Conditions in Selected Russian Sectors

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TRANSPORT

• A government entity controls at least one firm in the operation in:– transport infrastructure– air and rail passenger

transport services– air, rail, and road cargo

transport services. • Influence is extensive

through fares, cargo fees, infrastructure, and complementary markets Tu

rkey

Russ

ia

Mau

ritius

Paki

stan

Lith

uani

a

Mol

dova

Viet

nam

Nam

ibia

Zam

bia

Mon

golia

Peru

Keny

a

Chile

Hond

uras

0

2

4

6

8

10

12

9

Mean = 7

No. of Transport Segments with SOE

24

BANKING

Out of the ten largest banks in Russia, six are state-ownedBank Percentage of

banking assetsOwnership

Sberbank 23.7 State

VTB 8.0 State

Gazprombank 4.7 State

Rosselhozbank 2.9 State

Bank of Moscow 2.8 State

Alfa Bank 2.5 Private domestic

UniCredit Bank 2.1 Private foreign

Raiffeisenbank 2.1 Private foreign

VTB-24 2.0 State

Rosbank 1.7 Foreign

The asset share of foreign owned banks in the Russian banking sector is much smaller compared to that in neighboring countries

2003 2007 20080

10

20

30

40

50

60

7.4

17.218.7

47.150.9 51.1

Russia FSU, Average

Perc

ent

Source: Kalyuzhnova and Nygaard (2011) 

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CONSTRUCTION

• Construction is an important sector in the Russian economy, with the growth potential remaining high

• There are however competition constraints, in particular in the lack of level playing field between incumbents and new entrants

• Construction markets have characteristics prone to collusive and cartel behavior…

• …while licensing scheme for the operation in each segment of the supply chain is cumbersome

Russia

Macedonia

Bulgaria

Poland

Slovenia

Lithuania

Estonia

Czech Rep

Hungary -

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Dealing with Construction Permits

Cost (% of income per capita)Average

Cost

of C

onst

ructi

on (%

of i

ncom

e pe

r cap

ita)

Source: World Bank Doing Business Indicators

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(V)Competition Policy in Action:The Australian Experience

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The Australian Experience – “What”....

Developing a political consensus among Australia’s regional governments- Pressure from the business sectors exposed to international competition (agriculture and

large enterprises) pushed for reforms of nation-wide infrastructure (energy, ports).- Establishment of a formal Council of Australian Governments and continuous meetings with

all levels of government in special Premiers’ Conferences => creation of a formal institutional setting for cooperation on the reform agenda=> recognition of the importance of nationwide competition as a driver of enhanced productivity and higher living standards.

Australia’s competition oriented reforms happened in three waves:1. Increasing exposure to international market (early 90s)2. Development and Implementation of a National Competition Policy (NCP) (based on the

landmark Hilmer Report – mid 90s)3. Regular updates of the National Competition Policy (late 90s onwards)

Comprehensive reforms coordinated across all levels of government aimed to:– Reform all legislation that restrict competition– Implement a culture of “continuous improvement” in regulatory quality – Implement competitive neutrality for all govt. businesses– Provide third-party access to significant infrastructure facilities

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• NCP ‘competition payments’ made from federal to state governments that implemented specific reforms

• Pecuniary penalties imposed on slow reformers (with reduced or delayed budget transfers from the central government)

• Payment represent the State’s share of additional revenue arising from the NCP

.... and “How”– The NCP’s incentive payments (I)

-400

-200

0

200

400

600

800

1000

1997-98 1999-2000 2001-02 2002-03 2003-04 2004-05 2005-06

AUD

mil

Actual payments Penalties

State government NCP payments and penalties

The NCP has reduced barriers to entry and exit and improved competitionIt is estimated to have increased GDP by 2.5% (excluding dynamic effects)

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The NCP’s incentive payments (II)

• Queensland (2003)– Failure to address

anticompetitive restrictions in liquor licensing.

– 5% permanent deduction penalty of Queensland’s 2003-2004 competition payments

• Western Australia (2005)– Uncompleted plans for

water systems– 5% suspension penalty of

Western Australia’s 2005–2006 competition payments

– Reform goals were finally met in 2007 and suspended payments disbursed

Most states have met reform goals in competition policy on time…… but some cases of pecuniary penalties for slow reformers exist.

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Australia’s Current National Reform Agenda (NRA)

• The NRA aims to build a seamless national economy by harmonising key regulations across jurisdictions

• Focused on energy, transport, regulatory reform, infrastructure, climate change and human capital

• Renewed focus on State partnerships with “National Partnership Payments” to incentivise state reforms (AUD450 mil)

• Three payment types:– Project: support specific projects– Facilitation: initiate reform in a

specific area– Reward: based on achievement

of reform benchmarks

0

1

2

3

4

5

6

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

less

rest

rictiv

e m

ore

rest

rictiv

e

Australia New Zealand US UK Euro-zone

ETCR

Result: Australia is a model reformer

Restrictiveness of Regulation in energy, transport and communications sectors

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Economic Development: A General Conceptual Framework

The government can affect competition through:

Entry and exit regulations

Red tape and access to state aid (rivalry);

FDI and Trade Policy (International and Potential competition)

Regulation of Infrastructure and Service Sectors

Other Factors: Geography (Location,

Climate), Natural Disasters; Civil Wars; Other

External Shocks

Input Markets: Labor, Capital,

Technology, Land

Firm Productivity